Globalisation Of Markets, Theory Of Absolute Advantage And Comparative Advantage, And Implications Of Import Tariffs On Domestic Customers And Companies

Globalisation of Markets

Questions:

1.Globalisation can be described as a process which integrates people, Businesses, Economy and Organisations of different nations. In other words it can be understood as intercontinental social, political and economic integration (Zajda and Rust 2010).

2.When you compare Absolute Advantage Theory and Comparative Advantage Theory, which one appears to be more practical, and why? Also, explain how benefit from trade arises based on this theory using a numerical example of 2 countries producing 2 products.

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? 

1.Globalisation of markets is considered as one of the most productive developments of the recent years. It has wide ranging impacts and varies in terms of extensity, velocity and intensity. Globalisation of markets has increased the interdependency among various economies of the world. It has brought the new changes in the existing mind sets and behaviour of the people but these changes has also some negative impacts on the domestic markets. Globalisation has presented various challenges as well as opportunities for the domestic businesses. In order to grasp the opportunities the market players need to be attentive and well prepared (Cavusgil 2017). 

More market share

Globalisation provides domestic businesses access to global markets. It enables the businesses to expand their operations outside the national boundaries. It has eased the procedure for entering the new geographical boundaries. According to Wheatley (2010) expansion is no more a choice. In order to prosper companies need to expand their operations overseas.

Exchange of technology

Technology is the most important tool in globalised world to fight completion and satisfy global customer. One of the most striking implications of globalisation on domestic businesses is exchange of technology. It enables the companies to share new technologies. It helps the business to exploit new business opportunities (Surugiu and Surugiu 2015).

Knowledge sharing

In the recent environment, information has emerged as a most valuable source. The globalisation has enabled the companies with ease to share the information of different countries. Easy availability of information helps the domestic businesses to plan effective strategy for overseas operations (Crowther and Aras 2011).

Network and Alliances:

Theory of Absolute Advantage and Comparative Advantage

In order to meet the needs of globalisation it has become important for the companies to enter into partnerships or alliances with other countries of same country as well as with the foreign country. These network and alliances are of great help to the company. It provides them with the benefits of sharing resources, risks and capital.

Cut throat competition

The globalisation has introduced the firm to the cut throat competition in the market. The company has to compete with various companies in order to sustain in the market.

High risk

The globalisation has exposed the domestic business to various kinds of risks. The major risks associated with the globalisation are the financial risks.  These risks arise from the volatile capital movements (IMF 2008). The other risk arises because of the constantly changing business environment. The globalisation has introduced higher degree of risks to the domestic businesses.

Legal challenges

Globalisation leads to cross border expansions.  This expansion is not easy because every country has its own rules and regulations. For entering a new market the company needs to have a profound knowledge of the law and business regulations of the other country.  This is sometimes not possible for a company this introduces the company to various legal challenges.

2.Theory of absolute advantage and theory of comparative both are very relevant theories in the international marketing. The theory of absolute advantage was given by Adam Smith and aims at providing the product or service at a lower cost than that of its competitors. The theory said that countries should produce what they are best at, because that could enable the country to produce more efficiently in the same amount of time. The term comparative advantage can be explained as the leverage that a business have over its competitors. The theory of comparative advantage was given by David Carlo and emphasises on providing a product or services at a lower opportunity cost than that the competitor (Viner, 2016).  The major difference between both the theories is that the theory of absolute advantage takes into consideration the monetary value whereas the theory of comparative advantage takes into consideration the opportunity cost. Both of the theories have their own importance depending upon the different sectors and different scenarios. Still it can be said that theory of absolute advantage has a more practical approach because it emphasises on specialisation. It is practically true that every country has its own speciality and ability to produce, depending upon the resources it has. The theory of absolute advantage takes this into consideration and therefore practically more suitable. Numerical example to explain how these theories are helpful in generating benefit from the trade:

Implications of Import Tariffs on Domestic Customers and Companies

The table shows that UK can produce bags in lesser time than USA whereas; USA can produce shoes in a lesser time than UK.

The table shows that if countries start producing what they are best at it will end up generating the advantage for the countries. According to the previous table both the countries were able to manufacture unit of bag and one unit of shoes. In total they produced 2 units of nag and 2 units of shoes. But according to the second table UK can produce (180/80) 2.25 units of bags and USA can produce (210/90) 2.33 units of products. The example shows that there is an increase in production of both the products. The example demonstrated how theory of absolute advantage generated benefit to the trade of both the countries.

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?

Donald Trump recently imposed tariff of 45% on Chinese imports. The reasons and impacts on domestic customers for the same are discussed below:

Protection of consumer

One reason could be the president Trump felt that Chinese products could endanger their population. Recent example was ChemChina acquainted Syngenta this raised threats for American food supply regime (Gehrke 2016). This is just one example various other Chinese products were low in quality and held the potential to harm the US population in some or the other way.

Protection of American customers

Another reason behind this move was to protect American jobs (Fox news 2016). Competition from low wage economies like china has adversely affected American workers. US workers lost at least 2 million jobs from 1999 to 2011 because of the increasing imports from China (Schuman 2016).

Protection of domestic industries

One of the major reasons for this decision could be protection of domestic industries of USA.  The decision was taken by taking into consideration the protection of infant and ageing industries. The China was selling the products in USA market at a much lower price this raised the competition for domestic industries of USA. Rise in the import tariff will increase the prices of Chinese products in the domestic market. This will lead to reduction in the competition.

Retaliation

Another reason for imposing the high tariffs could be retaliation or revenge. This could be because the trading partner has not played by the rules. In an interview the US president said that soon China has to play by the rules. It is the country responsible for US trade deficits.  The president also added that China is not a market economy and they were cheating the US and now it’s the high time that they should start playing right (Tweed, Niquette and Jacobs 2016).The revenge or making the other player follow the rules could be one of the major reasons for introducing import tariffs.

Impact of this intervention on domestic customers-

This intervention can prove to be a costly affair to the domestic customers and companies of USA.  In 2015 trade between USA and China reached to $598 billion. Many things ranging from smartphones to sneakers were manufactured in China at very low prices (Schuman 2016). According the economist the increase in tariffs by 45% could impact the retail prices by 10% price hike. This price rise was ultimately to be borne by domestic consumers (Fox news 2016). This decision specially impacted the low income segment of the country. The domestic customers are also job seekers. Viewing from that perspective the import tariff on China could lead to increase in the number of jobs for US job seekers. According to a study 55 cents of every $1, spend by the American shopper goes to the American pockets. It is because the Chinese industries use services of Americans.  Overall impact of this intervention will be domestic consumer with low income will end up buying only few products.

References

Bremmer, I. 2014. The New Rules of Globalization. The Harvard Business Review, viewed on 1 August 2017 from, https://hbr.org/2014/01/the-new-rules-of-globalization

Cavusgil, S.T. 2017. Globalization of Markets and Its Impact on Domestic Institutions, viewed on 1 August 2017 from https://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=1004&context=ijgls

Crowther, D. and Alas, G. 2011. How Globalization affects businesses, viewed on 1 August 2017 from https://bookboon.com/blog/2011/10/how-globalization-affects-business/

Fox news, 2016. For Americans, Trump’s tariffs on imports could be costly. FOX NEWS, viewed on 1 August 2017 from, https://www.foxnews.com/politics/2016/12/01/for-americans-trumps-tariffs-on-imports-could-be-costly.html

Gehrke, 2016. Rubio: China’s latest purchase could endanger U.S. food, viewed on 1 August 2017 from, https://www.washingtonexaminer.com/rubio-chinas-latest-purchase-could-endanger-us-food/article/2587358

IMF, 2008. Globalization: A Brief Overview, viewed on 1 August 2017 from, https://www.imf.org/external/np/exr/ib/2008/053008.htm

Schuman, M. 2016. How a Tariff on Chinese Imports Would Ripple Through American Life. The New York Times, viewed on 1 August 2017 from https://www.nytimes.com/2016/04/08/upshot/how-a-tariff-on-chinese-imports-would-ripple-through-american-life.html

Surugiu, M.R. and Surugiu, C., 2015. International Trade, Globalization and Economic Interdependence between European Countries: Implications for Businesses and Marketing Framework. Procedia Economics and Finance, 32, pp.131-138.

Tweed, D., Niquette, M. and Jacobs, J. 2016. Trump Says China Will Have to Play by Rules Under New Ambassador, viewed on 1 August 2017 from https://www.bloomberg.com/news/articles/2016-12-09/trump-vows-china-will-play-by-the-rules-with-branstad-on-post

Viner, J., 2016. Studies in the theory of international trade. Routledge.

Wheatley, J. 2010. Globalisation: Companies must expand to prosper. The Financial Times, viewed on 1 August 2017 from https://www.ft.com/content/a9288530-edfe-11df-8616-00144feab49a

Zajda, J. and Rust, V. eds., 2010. Globalisation, policy and comparative research: Discourses of globalisation (Vol. 5). Springer Science & Business Media.