economics

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The advantages and disadvantages of International Trade

Introduction

International trade is important to a country with another country. It refers to a country’s economic, social and political. International trade is the economic interactions between different nations in the exchange of goods and services by importing and exporting. Why do modern countries trade with one another? There are some reasons that countries involve in international trading. For example, some countries lack of raw materials like timber, rubber, oil and petroleum. To gather these materials, countries must trade with other countries in order to get what they want. For example, a country which lacks of timbers, its citizens would unable to produce furniture or related products. By involving itself in international trade, its citizens can get timber to produce. In return, the country pays the foreign suppliers money as a medium of exchange. In most countries, international trade represents a significant of gross domestic product (GDP). International trade allows countries to exchange goods and services with the use of money as a medium of exchange. International trade has advantages and disadvantages to a country. International trade helps countries to share their prosperity and technical know-how in order to sell their surplus items mutually.

1.1 Advantages of International Trade

1.1.1 Increase of Total World Production

The first advantage is absolute advantage and comparative advantage can help a country to increase its outputs through specialization. As a result it will increase the total world production. Absolute advantage occurs when one country can produce more of one product compared to other country with using the same of resources. Comparative advantage states that countries can benefit through specialization and trade the production with each other to lower the opportunity cost. For example, Malaysia and Indonesia are the countries which export timbers and rubbers. However, Malaysia’s land area is smaller and limited. Thus, Indonesia gains absolute advantage to specialize in exporting timbers because it has large land area to replant after cut down the trees. Conversely, Malaysia is famous with its good quality of latex and rubber products. Thus, Malaysia should more focus in exporting rubbers than timbers. Malaysia gains absolute advantage to specialize in producing latex and exporting rubbers. On the other hand, Malaysia and Indonesia can gain comparative advantage through trading with each other. For example, Malaysia exports rubber to Indonesia, as return Indonesia will export timbers to Malaysia. When countries can produce through comparative advantage, it helps to reduce duplication and waste materials

1.1.2 Increase in Consumption Power

The second advantage is increase in consumption power. A country’s nation who involves in international trade is usually has good income. It is because they know to export their products to other countries to earn more money. Thus, they can generate higher incomes and able to afford in demand imported goods. Those people who rich may demand imported goods to improve their standard of living. It is because imported goods are usually having better quality, design and features. It has not only improved people’s standard of living but also economic growth within a country.

1.1.3 Reduction Unemployed Resources

The third advantage is reduction in unemployed resources. If a small firm needs to increase production for export purposes, it must intensify productivity and enlarge the firm. Firms should have four factors of production from the households, which is capital, entrepreneur, labor, and land. To enlarge the firm, entrepreneurs need to buy or rent a bigger size land, increase number of machines, and employs more labors to launch the business. It also helps other firms to get business opportunities like transportation and suppliers.

For examples, firms need to pay transportation fee for shipping or airline, and buy materials from the suppliers. On the other hand, it also provides job opportunities for local citizens like work as technician, engineer, staff, cleaner, lorry driver and others. As a result, there will form a positive circular flow between firms and households. Households provide factors of production to firms, whereas firms will pay factor incomes for exchange. Eventually, it helps to increase a country’s national income.

1.1.4 Improve Local Products’ Quality

International trade helps in improving local product quality. Goods that produced for export purposes are usually have better quality, attractive design, pricing, variety choices and features in order to be competitive. Firms which want to be more competitive and gain more market share, they must be innovative and keep improving their products. In Malaysia, two local car manufacturers which are Proton and Perodua tend to be more competitive to save their firms. In order to withstand importers’ car like Toyota, Nissan, Mercedes-Benz and BMW, they change their pricing strategy and try to improve their cars’ quality. For example, Proton and Perodua have promoted their new MPV cars, which are Exora and Alza at a cheaper price compared to imported cars.

1.1.5 Increase Producer’s Market Size

The fifth advantage is producer’s market size will increase through the international trade. Malaysia’ market size is small compared to ASEAN and European countries. Some producers not only sell their products in local, but also sell to overseas in the international trading. As a business man’s thought is concentrate how to increase his profitability. Thus, smart entrepreneurs will keep finding other markets to enter rather stay at local market. This will allow them to enjoy more profits by exporting their products to overseas.

1.1.6 Achieve Economic of Scale

The sixth advantage is producer can achieve the economics of scale. Local market is small, thus the output for local is less due to the low demand. Producers are not profitable then they move their targets on foreign markets by expanding their business. In addition, the producers can achieve the economics of scale with producing large amount of goods. It is because producer buys materials from supplier at large quantities and they enjoy the discount. This allows the producers reduce their cost of production and increase the output massively.

1.1.7 Political Alliances & Allegiance

The seventh advantage is political alliances and allegiance. International trade encourages the development of trading links between countries to closer political links. Countries that involve in trading internationally with each other will form a closer political relation within each other. For example, Malaysia has a trading and political links with some countries like US, China, Japan, England and Korea. Political alliances make the relationship between each other getting closer and clearer. In addition, political alliance is very important for a country against being invaded the territories by other country. Therefore, many countries having international trading link with each other and form a stable political alliance. An alliance country usually will be protected against enemies. During the emergencies occur, alliance countries could be received emergency help easily. For example, during the World-War Two US was helped Malaysia in military against Japan armies. Import and export activities bring some disadvantages to the country.

1.2 Disadvantages of International Trade

1.2.1 Available of Undesirable Goods & Services

The first disadvantage is available of undesirable goods and services. If a country trades with another country based on free international trade, which mean all the goods and services will be available. If there is a demand, there will be a supply if the price is good. Even illegal items will be available in the free international trade countries. Thus, the country will be freely trade whatever they prefer such as weapons, drugs, and pornography. Hence, it will socially harmful to a country like increasing in crimes rates.

1.2.2 Preference of Producer Exports

The second disadvantage is preference of producer to export rather than sell in local. Different markets have different price, price of the product is based on the demand power in the country. Normally, price discrimination encourages the producers to sell more in the markets which provide higher profits. If the level of demand of the product is high in that country, in turn the price of that product will increase. If the product can sell at higher price in Japan, the producers will enjoy more profits and produces it more to be exported to Japan. Hence, the producer will less concentrate on local market and move their target to Japan’s market.

1.2.3 Local Firms & Producers Affected

The third disadvantage of international will influence the local firms and producer. Although it is truth state that international trade will make a firm became more competitive and innovative. However, some firms still will be affected and eventually will close down their business. For example, imported textiles from China are very cheap compared to local made due to the cheap labor cost and materials cost. Thus, some entrepreneurs will unable to cope with the environment, which less of innovative thinking and lack of experiences will lead to business failure. Furthermore, some producers will decide to quit the market and end the business. It is because of their thoughts which cannot compete with those cheaper cost productions of producer.

1.2.4 Currency & Capital Outflow

The fourth disadvantage is outflow of capital and domestic currency. Import activities increase the outflow of domestic currency in order to pay for the imported goods. If a country imports ratio higher than exports ratio will cause the devaluation of domestic currency. For example, when we demand US products, we must offer our Ringgit Malaysia to buy US dollar for the payment. On the other hand, a foreign partnership person will transfer their capital in the form of portfolio investment will cause outflows of interest and dividend. Therefore, some governments have restriction on foreign ownership of its specific industries such as utilities, transportation and communications. This helps to avoid foreign investors to have ownership of a country’s wealth and capital outflows.

1.3 Conclusion

Based on the answer above, there are seven disadvantages and four disadvantages in the international trading. International trade between countries can benefit each other from several advantages. Firstly, it helps a country to define its absolute and comparative disadvantages. Second, it helps to increase the level of consumption in a country’s market. Third, it aids in reducing unemployment resource which means factors of production LLCE can be fully utilized. Fourth, international trade also helps in improvement of product’s quality and efficiency. The fifth advantage is increasing the producer’s market size. The sixth and seventh advantages are achievement economic of scale and political alliances. However, international trade will bring some impacts within a country which cannot be denied. For example, a country would receive undesirable goods and services that socially affect its citizens. The second disadvantage is preference of producer to export rather and dislike sell in local due to the profitability factor. The third is local firms and producers will be affected by importing foreign goods. The last disadvantage is a country’s capital and currency will outflow.

2.0 Introduction

Malaysia has been learnt experiences from The Asian Financial crisis since 1997. The financial crisis was started in Thailand. Eventually it has affected many countries like South Korea, Philippines, Malaysia, Hong Kong and others. Moreover, Malaysia had to face another financial crisis again in 2007 in the past 10 years. But Malaysian government had gained experiences in 1997 and will be capable for to handle this crisis. Financial crisis really make people to be frightened, it made a investor lost confidence and therefore will decided to quit the infected market. A country which explodes financial crisis will eventually influence the other countries. Just like financial crisis in 2007 occurred in US, due to the housing bubble incidents had made many financial institutions collapsed and unemployment rate increased dramatically. Consequently, it made American government to be lost in large of amount of dollars. To overcome the financial crisis, government can take actions by intervention to the market in order to recover the economy.

2.1 How Malaysia overcome economic crisis

2.11 Fixation of currency

The Asian Financial crisis occurred in beginning of July in 1997. It had raised fears of worldwide economic recession due to financial contagion. The crisis was started in Thailand with the financial collapse of the Thai baht caused by the decision of Thai government to float the bath and cut the peg to the USD. Indonesia, South Korea and Thailand were the most affected by the crisis. Hong Kong, Laos, Malaysia and Philippines were also infected by the crisis. Less than 2 years time, Malaysia broke out of the crisis with the fixation of currency and regulating foreign capital. This strategy was implemented by our Prime Minister, Mahathir Mohammed who imposed strict capital controls and introduced a 3.80 peg against US dollar. In the year of 1998, Malaysia’s economy started its first in recession. The construction, manufacturing and agriculture sector had shrunk and the country’s GDP plunged 6.2% during 1998. In that year, the ringgit also plunged below 4.7% and the KLSE fall below 270 points. In September of 1998, the principal decided to move the ringgit from a free float to a fixed exchange rate regime. On the other hand, Bank Negara Malaysia fixed at the ringgit 3.8 per dollar. Furthermore, some task force agencies were formed such as the Corporate Debt Restructuring Committee which dealt with corporate loan. Danaharta also discounted and bought the bad loans from banks to facilitate orderly the asset realization, whereas Danamodal recapitalized the banks.

2.2 Economic Stimulus Package

There is a global financial crisis had occurred in 2007. It was financial crisis triggered by a liquidity shortfall in the United Banking System. This incident made a lot of large financial institutions had collapsed or been bought out. The factors of this crisis were the bursting of US housing bubble during the peaked year of 2005 to 2006 and subprime problems. Around the world stock markets have fallen, all the governments have to come up with rescue packages to save their financial system. In Malaysia, it also has been affected by the crisis as the key factors showed signs of slowdown. The Malaysian Economy has been resilient in the first half year of 2008. This is the second time crisis that Malaysia faced again for the past ten years in 1997. To cope with this crisis, Malaysia’s government has announced several measures of economic stabilization plans.

2.2.1 Deposits Guaranteed

First the plan is all bank deposits are guaranteed by the central bank of Malaysia until the end of the year 2010. Government ensures all citizens’s saving money in banks that safe and available for anytime.

2.2.2 Injected RM7 million of Budget 2009

The second plan is putting RM5 million into a special purpose fund VALUECAP to support the stock market. To cope with the effects of world economy downturn, our Prime Minister Najib Tun Razak has announced RM7 million of Economic Stimulus Package during his budget 2009 during his speech in the Parliament on 4th November 2008. Government would inject RM7 billion to strengthen the economy and boost confidence within the private sectors.

2.2.3 Reduced Subsidies for Petrol & Removed Taxation

In addition, government would reduce subsidies on petrol because the RM7 billion mainly gather from savings and subsidies. The budget deficit has risen to 4.8% from 3.6% after the estimation revenues dialed down from RM176.22 billion to RM168.73 billion. In his revised Budget 2009 states that the inflation is expected to hold around 3~4%. There 7 measures in the Budget 2009 which is providing RM1.2 billion to be allocated for construction to build more low and medium cost houses. The second is removing the 5% of import taxation on fertilizers, cement and steel.

2.2.4 Extending hypermarkets’ business hours

The government is allowing all the hypermarkets to extend their business hours and close late. They can extend their business hour till 11pm on weekdays, whereas can close at 1am on weekend. With the longer extending time for business operation, entrepreneurs can gain more profits and can encourage people to consume goods and services.

2.2.5 Spending RM500 million for maintenance and infrastructures

The government is spending RM500 million for the maintenance of police stations, public facilities and quarters, especially for army camps. Besides, it also provide RM200 million to build Chinese, Tamil, religious and mission schools. The allocation will be divided into quarters for each school. Furthermore, government also giving RM200 million for pre-school education like kindergartens. Besides, employee can decide themselves to reduce their EPF contribution by 3% voluntarily from 11% to 8% for two years duration. This will allow more money will flow into the market rather keeping in EPF account. Hence, it will increase the citizen’s level of consumption and help in recovering of economy.

2.3 Applying monetary policies

On the other hand, Malaysia’s government can cope with the financial crisis by applying the monetary policies. Bank Negara Malaysia will continuously access the appropriateness overnight policy rate (OPR) and monetary policies go forward. This will allow ensuring the stability in domestic credit expansion and economic activities. The central bank has frontloaded the cumulative 150 points in reduction of OPR to make sure the moderation in the prospects for growth and inflation. Bank Negara stated that lower interest rate would provide more support for domestic demand like borrow loan for business purposes. With the availability of credit at lower cost, thus it can increase the disposable income through lower debt servicing costs. As a result, it can attract more people in applying loans for business like construction activities, investment and buy house.

2.4 Malaysia can learn China’s solutions as reference

2.4.1 Expands employment through investment

On the other hand, Malaysia should stimulate domestic consumption to encourage economic activities. Malaysia can practice China’s government by taken some action to stimulate domestic consumption. First, China’s government expands employment by investment in the tertiary industry to enhance the income of resident.

2.4.2 Reduce personal taxation & intervention in housing price

China’s government reduces the tax by increasing the tax threshold for personal income. Moreover, China’s government interferes in pricing control to avoid price increases. Besides, its government is taking action to maintain housing price. This helps to avoid instability in the real estate market and rapid declination in housing prices. Housing prices can be maintained through market mechanism and increase the housing supply.

2.5 Conclusion

To overcome economic crisis, government can take several action to solve it. In the year of 2007, there was an Asian financial crisis and Malaysia was one of the countries being affected. Malaysia was refused to take help of IMF and solved the problem independently as same as Singapore. Our previous prime minister, Dr. Mahathir had imposed strict capital controls and introduced a 3.80 peg against US dollar. There was also task force agencies formed to deal with corporate loan and Danamodal recapitalized the banks. In another financial crisis in 2008, our presence prime minister, Najib Tun Razak has announced RM7 billion of Economic Stimulus Package during his budget 2009 during his speech in the parliament. The injection of RM7 million could strengthen the economy and boost confidence in private sectors. The amount of money gathered from removal subsidies of petrol and savings. In the Budget 2009, there are seventh solutions to solve the economic recession. On the other hand, Malaysian government can learn other countries like China’s strategies as the references to improve our economic growth and solve the crisis.


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