Questions:
1.What is Globalization and how does it affect Domestic Businesses?
2.When you compare Absolute Advantage Theory and Comparative Advantage Theory, which one appears to be more practical, and why?
3.Donald Trump, president of United States of America, announced the imposition of tariff on Chinese imports in the recent past. Based on your understanding of the first 3 topics of this unit, (i) what could have been the reason/logic behind such a comment/decision, and (ii) what are the implications of such an intervention on domestic consumers?
Globalization is the process in which movement of goods, services, people technology, etc. take place. In business term; it is investing the funds beyond the home country around the globe (Hirst, Thompson & Bromley, 2015). In other words it can be said that globalization is the process in which interaction and integration occur among the people, companies, etc. globalization helps countries in opening new markets for the business. After the emergence of the globalization there is an increase in the foreign transactions of the companies. There are many countries across the world that conducts there working in the home country.
Globalization creates an impact on the working of the business. Domestic businesses think of expanding the business and availing the advantage of the globalization. Domestic businesses get the opportunity to expand the business in the global market. Globalization provides a new way to the domestic business through which they can adapt innovative ways and advance technology, which helps the companies to bring change in the existing product (Crane & Matten, 2016). Some of the points related to the positive and negative impacts of globalization on domestic business are discussed below.
This theory shows the ability of the party to product greater quality by using limited amount of resources than a competing entity. This theory is basically used by the Producer that requires less quantity inputs to be produced. So the company who need bulk production will not use this theory (Huxham & Vangen, 2013).
This theory shows the ability of a party to produce a particular goods and services at a lower opportunity cost and marginal cost over the competing entity (Feenstra, 2015). This theory helps in identifying the specialization of the country in the production of the particular goods. The opportunity cost refers to as the loss of other alternative when company already chosen one alternative (Teece, 2014).
Out of both the theories, the theory which appears to be more practical is Comparative advantage theory. Each and every country has different specialization in the production of the goods. By applying the theory the countries are able to identify their field of specialization that ultimately brings the efficiency. International trade allows the nation to enjoy the benefit of providing multiple products at the reasonable prices but each nation can bring efficiency production of one product itself. Hence, for the identification of that one product companies need to follow the comparative advantage theory. That is the reason behind increase in the use of the comparative advantage theory by the company.
Example- Assume that France and Italy have enough resources to produce either Wine or Cheese. France can produce 10 units of cheese or 20 units of wine. The opportunity cost of per unit of the cheese is 20/10, that is 2 units of wine. On the other hand the opportunity cost of per unit of the wine is 10/20, that is 0.5 units of cheese. Italy has the abilities to produce 22 units of cheese or 30 units of wine. Over here, Italy has an absolute advantage for producing cheese and wine. Italy is having the opportunity of wine is 22/30, or 0.73 units of cheese while the cost of the cheese is 30/22, or 1.36 units of wine. It is clearly shown Italy’s opportunity cost of the production the wine is quiet high then the France’s. Italy’s opportunity cost for the cheese is low as compare to the France. Neither nation can produce both wine and cheese (Investopedia, 2017).
The best strategy both the countries can follow is France to specialize in the production of the wine, the reason being the country has a comparative advantage. Italy should produce cheese, through which the country can enjoy the efficiency in the production of one item. Nations can take along innovative technologies to bring the change in product; which they are specialized at the low cost. Hence, there will be increase in the trading opportunities. The use of technology enhances the quality of the products. Over here, both the countries get the trade benefits in terms of the opportunity, efficiency, demand, low cost, etc.
3(i) Donald trump who is president of United States of America, announced the increase in the tariff on Chinese imports. In the year 2015, the president decided to impose 45% tariffs on all the Chinese imports (Reuters, 2016). Earlier in the year 2011, US president trump impose the tariff on the Chinese imports- 25%. Hence, this is not the 1st time US president Donald trump is imposing tariff on the Chinese imports. As per my understanding, the high tariffs on the imports by the US president will force china to decrease the trade with the US. Hence, this increases the demand of the domestic businesses products. Earlier, due to the availability of the Chinese products at cheap prices customers avoid buying product from the US industries. The step taken by the Donald trump is to increase the business of the US industries (Flores, 2016). Due to this step there will be increase in the protection/creation of the jobs in America, US. These could have been the reason behind the logic or behind the decision. In front of the Chinese imported products; the US industries will not be able to sustain in the market then they have to shut down the business. This may lead to the exploitation of the business established in US.
Considering the above topics globalization is essential for each and every nation. Based on the Ricardian theory of comparative advantage free trade helps all countries. Tariff creates an effect on the relative supply of wealth to the 3 principles (labor, capital and natural resources). The increase in the tariff by the US on china imports creates an effect on the exports industries of the US. Similarly, china can retaliate and place tariffs on the US exports (Monetarist, 2016).
3(ii) Decision of increase in the tariff on china imports creates an intervention on the domestic buyers. Domestic customers will not be able to buy imported goods as previous. Customers have to buy the products available in their domestic country. This will increase the demand of the products of the US industries. For the US products customers might have to pay huge amount. Import facility is done by US because there are some products which they are getting on cheap prices due to import facility. On the other hand if US produces same product; domestic customers have to pay huge prices. Government can crack the deal with the other countries for the substitutes of the Chinese products. In that case customers might have to face the problem with the quality or prices of the substitute products. Chinese imports not only include finished products delivery but it also includes raw materials for the US industries. This may force the industries to shift to the other places where they will be able to get the adequate availability of the row material. This may hamper the availability of the products to the customers. If there is a change in the working of the US industry then the customers also have to bear that; in the way of irregular delivery of the products.
References
Baylis, J., Owens, P. & Smith, S. eds., 2017. The globalization of world politics: An introduction to international relations. Oxford University Press.
Crane, A. & Matten, D., 2016. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.
Flores, R., 2016 January 7th, Donald Trump wants huge tariffs on Chinese exports to the U.S., CBS News, viewed on 1st August 2017, https://www.cbsnews.com/news/donald-trump-wants-huge-tariffs-on-chinese-exports-to-the-u-s/
Hirst, P., Thompson, G. & Bromley, S., 2015. Globalization in question. John Wiley & Sons.
Huxham, C. & Vangen, S., 2013. Managing to collaborate: The theory and practice of collaborative advantage. Routledge.
Investopedia, 2017, What is the difference between comparative advantage and absolute advantage?, viewed on 1st August 2017, https://www.investopedia.com/ask/answers/033115/what-difference-between-comparative-advantage-and-absolute-advantage.asp
Monetarist, T.M., 2016, Trump, Tariffs And Trade With China, viewed on 1st August 2017, https://seekingalpha.com/article/3958102-trump-tariffs-trade-china
Reuters, 2016, Here’s How Donald Trump’s Trade Policy Could Backfire, viewed on 1st August 2017, https://fortune.com/2016/03/24/trump-tariff-trade-china-mexico/
Teece, D.J., 2014. A dynamic capabilities-based entrepreneurial theory of the multinational enterprise. Journal of International Business Studies, 45(1), pp.8-37.
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