Problems of International Trade Case Study: Nigeria Free Essay Example

1. INTRODUCTION

International trade is the exchange of goods and services among countries for money. This involves the importation and exportation of goods and services. Many countries in the world are faced with problems engaging in international trade successfully. However international trade is one of the major determinants of a countries economic growth. Ideally every country should export more goods and services than it import goods and service. This differs on the natural resources, technology and labour force. Nigeria is Africa’s most populous country with a population of over 150 million people.

It is one of the largest oil producers in the continent creating huge inflows of foreign income.

Without question it holds enormous commercial potential as recent administrations have focused on developing the non-oil economy and tackling corruption. The explosion of the industry such as the mobile telecoms market and the unparalleled success of foreign companies such as South Africa’s MTN have also demonstrated that the potential can be turned into reality.

Despite persistent problems corruption and bureaucracy the international business community increasingly sees Nigeria as the central driver of a vast African market that remains the last under-developed commercial market in the world.

Currently Nigeria is faced with so many problems affecting the international trade which is the buying and selling of goods and services with other countries.

1.1 BACKGROUND

In the early days Nigeria’s major exports were cocoa and palm oil, but since the discovery of crude oil Nigeria, things has taken a different turn. In deed the pursuit of Nigeria’s crude oil has taken the character of a gold rush, with major companies from all over the world competing fiercely with one another for access to promising reserves.

This ‘oil rush’ has enormous implications both for African oil producers and for the major oil – importing countries for the producing countries it promises both new wealth and a potential severe internal discord over the allocation of oil revenues, for the consuming countries it entails growing dependence on imports of a virtual substance from a region of chronic instability with obvious national security overtones. This research aims to find out the major problems of international trade in Nigeria despite its rich natural resources.

2. LITERATURE REVIEW

Within this literature review, the relevant theories and perception of international trade and its problem in Nigeria have been explored. Dixit and Norman (2002), tells the two broad themes in the theory of international trade. One is qualitative, being concerned with the pattern of trade, that is which country will export which good. The standard theory relates this to comparative advantage that is to international differences in relative opportunity cost and then tries to explain comparative advantage in terms of differences in technologies, factor supplies, etc. this theme is also concerned with the way in which trade in return affects such determinants of comparative advantage. The other theme is more quantitative and seeks to explain the terms of trade, that is relative prices of exports and imports in a trading world.

It also examines how they are affected by changes in data such as factor supplies or technology and polices such as tariffs. While they have stated the team as descriptive, it is clear that normative analyses will have to be based on , and will benefit from, a proper understanding of them. Also within this literature review, Rugman and Simon (2009 p 162) states ‘the theory of absolute advantage holds that nations can increase their economic well-being by specializing in the production of goods they can produce more efficiently than anyone else”. Rugman and Simon (2009) also give reasons for trade barriers which effectively raise the cost of imported goods and makes them more expensive to local buyers, this is also a problem of international trade, because it encourages local production by making it more difficult for foreign companies to compete. Onkvisit and Shaw (1986) convey that economists have always advocated free trade because the practice increases efficiency and economic welfare for all involved. Free trade makes a great deal of theoretical sense, but it is ignored in practice by virtually all countries.

Despite some obvious advantages, nations are in dined to discourage free trade instead of promoting it. The temptation to protect one’s interests is the cause for this trade myopia. Governments in many countries distort trade and welfare arrangements to gain economic and political advantages or benefits. They use a combination of tariff and nontariff methods. It is impossible to list all marketing barriers, because there are simply too many of them. And governments continually create new import restrictions or adjust the ones currently in existence. Klare and Volman (2012) Compared Africa with the Middle East. Africa possesses a relatively modest share of the world’s petroleum reserves: about 9.4% of proven world reserves, compared with 61.7% for the Middle East. Nevertheless, the world’s major oil-consuming nations, led by the USA, China and the Western European countries, have exhibited extraordinary interest in the development of African oil reserves, making huge bids for whatever exploration blocks become available and investing large sums in drilling platforms, pipelines, loading facilities and other production infrastructure.

In the area of security Several African countries have also purchased US arms and equipment directly from US defense contractors through the Commercial Sales programme, overseen by the US Department of State. Major African beneficiaries of this programme in recent years have included Angola, Botswana, Kenya, Nigeria, Senegal, South Africa and Uganda. In 2003 the US Department of Defense (DOD) also commenced the delivery of seven surplus US Coast Guard vessels to Nigeria, significantly enhancing the Nigerian navy’s ability to protect offshore oil installations and oil tankers. In addition, the FY 2006 budget request includes $9.7 million in Economic Support Funds for the Africa Regional Fund, of which 25% will go to support counter-terrorism training and assistance for efforts to combat smuggling and money laundering. Frynas (2010 p 457) states that ‘Nigeria is the most populous and the largest African country.

Shell is the most dominant multinational company in Nigeria. For instance, in April 1997 the Shell venture accounted for over 42 per cent of Nigeria’s oil production. By the early 1990s oil production accounted for 90% of the country’ s foreign exchange receipts, while oil exports accounted for 97% of total export receipts. Oil production revenues provided for 70% of budgetary revenues and 25% of GDP’. Political instability has proved a major concern in Africa. Several recent quantitative studies have indicated that political instability in sub-Saharan Africa has inhibited savings and economic growth. Shell’s operations in Nigeria present a puzzle to scholars when political risk is considered. Risk management is one of the key objectives of multinational companies. A company such as Shell cannot fail to consider the risks which it faces in an unstable country such as Nigeria. According to authoritative macroeconomic risk analyses, Nigeria is regarded as highly unfavorable for business.

The Control Risks Group describes Nigeria as `one of the most difficult places in which to do business’. According to a KMPG survey, three quarters of British firms would not do business in Nigeria because of its reputation for fraud. Yet Shell has recently expanded its investments despite increasing political risks in the country and despite many alternative investment opportunities in other countries. Frynas (2010) also provides the Concepts of political risk and their relevance for Shell in Nigeria. Political risk is an important part of management literature, but as a concept it is difficult to grasp, and even more difficult to express in figures. A distinction between instability and risk is a useful starting point. Instability affects tangible goods such as buildings, equipment and state licenses. In other words, instability in the form of a riot or new legislation may cause serious damage to a company’s assets.

Risk is not a tangible thing but a bundle of expectations concerning potential future instability that have a market value and determine future earnings. In other words, risk is a subjective perception of how instability may affect the firm and it is assessed in order to predict the likelihood of different types of instability. A typical managerial analysis defines political risk as the likelihood that political forces will cause drastic changes in a country’s business environment that affect the profit and other goals of a particular business enterprise. Political risk here is thought of as a measure of how instability might affect the business enterprise. Business studies of political risk usually focus on country risk. For instance, the Control Risks Group rates political risk in Nigeria as `medium’ which is defined as `Political and economic stability is secure in the short term but cannot be guaranteed in the longer term because political and state institutions lack authority or are evolving or the economy is weak.

Aghedo & Osumah (2012) examines the current state of security in Nigeria, which is unremarkable and making the environment unsafe for foreign direct investment. In Nigeria the unprecedented terrorist operations of the Boko Haram (BH) terrorist group against the state have shattered the hope that peace would return to the country with the granting of amnesty to militant youth groups in the oil-rich but volatile Niger Delta region. Although home-grown terrorism is not peculiar to Nigeria, as shown by the involvement of nationals in the 11 September 2001 attacks on the US, the 7 July 2005 London bombings, the 29 March 2010 Moscow metro bomb attacks, and the almost daily bomb blasts in Iraq. Yet the novelty, intensity and frequency of BH’s violent campaign, especially the use of suicide bombing and unprovoked attacks on innocent people, are bewildering.

There are well founded local and global apprehensions that the sectarian violence spearheaded by the fundamentalist Islamic sect could lead to the disintegration of Africa’s most populous nation. Both local and international interests, including the state’s national police headquarters and the United Nations House in Abuja have been targeted and attacked, leaving many dead, others maimed and several properties destroyed, and triggering a wave of internal displacement, a complex emergency and mass exodus from the troubled northern region. The generalized sense of insecurity and ubiquitous bomb scares has crippled both political and socioeconomic activities.

3. METHODOLOGY

The methods used for this research were primary and secondary. For the primary research five Nigerian student where interviewed, questions about the major import and export goods in Nigeria, the top multinational Enterprises in Nigeria, the current situation of violence and their own opinion to of the problems of international trade in Nigeria. In the Secondary and qualitative methods of research theories, information and news were gotten from relevant books and current journals. Also information were gotten from government and economic website like Global issues website, export and government website, economy watch website and trade invest Nigeria website.

4. RESULTS

From the qualitative methods used in this research accurate and vital information were gotten. Clear problems of international trade in globally and in Nigeria were also found. The following results were gotten from and interview session with five Nigerian students; when asked what is Nigeria’s major export? All said Crude oil. What is Nigeria’s major import?, different goods where mention randomly as follows; Electronics, Mobile Phones, cars, and some Food items like rice, apple, etc. What are the top Multinational Enterprises (MNE) or Foreign Direct Investment FDI in Nigeria? The oil and the telecommunication in sector were mention. Shell was also mentioned as one of the top MNE in the Oil and gas sector. One of the interviewee mentioned Dangote Nigeria Limited as Nigeria’s indigenous MNE, they specialize in the production of cement and sugar. What do you think are the problems of international trade in Nigeria? Corruption was dominant in everyone’s answers.

What do you think about the current state of violence in Nigeria towards international trade? Different opinion were given randomly as follows; the increasing amount of suicide bombing by the Boko Haram terrorist group is devastating and sad because foreigners would be scared to invest, high level of political unrest and high rate of loss of life and property. The results gotten from the interview session corresponded with the results gotten from books, journals and the internet, however there are more identification of problems of international trade in Nigeria as follows; International Trade Scam, political risk, political instability, trade barriers and failing to take comparative advantage of which goods to produce.

4.1. FINDINGS

The findings of this research shows that Oil and natural gas are the most important export products for Nigerian trade and it exports approximately 2.327 million barrels per day, according to the 2007 figures. In terms of total oil exports Nigeria ranks 8th in the world. As of 2009, Nigeria has approximately 36.2 billion barrel oil reserves. Despite large scale liberalization efforts, this sector is under close check of the government agencies. (Economy watch 2012). This research suggests that corruption and political instability are the major problems of international trade in Nigeria.

5. DISCUSSION

There are many factors affecting the successful transaction of business between Nigeria and other countries. To correlate with some literature used in this research, no country can survive only on its own natural resources and products. Therefore it is necessary to trade with other countries. This has to do with the buying and selling of goods and services among countries. In this research Nigeria’s main natural resource is crude oil which is sold to other countries in the world mainly the USA, and in return buys cars, electronics, mobile phones, etc. from other countries. The problems of international trade in Nigeria found in this research are discussed as follows: Corruption is the act of being dishonest or illegal behavior in return for money and other rewards. A series of repressive and corrupt governments in Nigeria have been supported and maintained by western governments and oil corporations, keen on benefiting from the fossil fuels that can be exploited.

These foreign corporations such as Shell, Mobil, Chevron, Elf, etc. pay government officials to again access to the crude oil, while the welfare of the citizens and infrastructural development are neglected. Political instability and political risk is the unpredictable and unreliable state of the Nigerian government and economy. There are a lot of ills going on within the country such as the continuous suicide bombing attacks around the country by the Boko Haram terrorist group. This has made Nigeria and unsafe for Foreign direct investment. On the other hand oil and gas corporations like Shell have been faced with a number of difficulties caused by the instability of the Nigerian government but yet continues to operate in Nigeria because of the high rate of profit they make. International trade scam is also known as advance fee fraud.

One of the most common scams in international business is based in Nigeria and operates throughout the world. While there are many legitimate Nigerian companies who are doing business in the United States and with American exporters, there is also, unfortunately, an organized crime ring that tries to take advantage of American companies and individuals. Nigerian nationals, purporting to be officials of their government or banking institutions, will fax, mail, or email letters to individuals and businesses in the United States and other countries. The correspondence will inform the recipient that a reputable foreign company or individual is needed for the deposit of an overpayment on a procurement contract. The letter will claim that the Nigerian government overpaid anywhere from $10 to $60 million U.S. dollars on these contracts.

Recently, scams have also taken the form of bogus sales contracts. An African firm or government official requesting a rather large export sale will contact the targeted individual or company. The sale will often ask for samples (e.g. cellular phones and equipment) to be sent in advance of the sales negotiation. The scammers then try to get the victim 100% convinced that they would get the payoff. It is at this time that the “fees” are demanded. Nigeria has lost many foreign direct investors due to this act. Trade barriers is also a problem of international trade. The Nigerian governments continually create new import restrictions and adjust the ones currently in existence. This has limited many foreign companies from exporting the goods to Nigeria. Also tariffs placed on some goods have affected the demand of particular imports and exports.

6.1 CONCLUSION

This research has critically examined international trade and its various theories. This research has also identified that difficulties do exist in international trade, and using Nigeria as a case study some major problems have been found, like Corruption, Political Instability and international trade scam. These problems arise because of the rich natural resources and the greed of only a few individuals trying to benefit from what belongs to the nation. Despite the state of political instability many multinational Enterprises are still operating in Nigeria because of the high profit margin.

REFERENCES
AGHEDO, I. and OSUMAH, O., 2012. The Boko Haram Uprising: how should Nigeria respond?, Third World Quarterly, [online] Vol 33 (5), pp. 853-869. Available from: http://www.tandfonline.com/doi/pdf/10.1080/01436597.2012.674701 [Accessed 18 August 2012]. DIXIT, A.K. and NORMAN, V., 1986. Theory of International Trade : A Dual general equilibrium approach. [Online] New York: Cambridge University Press. Available from: http://www.cambridge.org/gb/knowledge/isbn/item1131480/?site_locale=en_GB [Accessed 19 August 2012]. ECONOMY WATCH, 2010. Nigeria trade, exports and imports. [online]. Singapore: Stanley St Labs. Available from: http://www.economywatch.com/world_economy/nigeria/export-import.html [Accessed 17 August 2012]. EXPORT. GOV, 2007. International Trade Scams. [online]. Export.gov. Available from:
http://export.gov/tradeproblems/eg_main_018586.asp [Accessed 20 August 2012]. FRONTIER MARKET INTELLIGENCE, 2010. Doing Business in Nigeria. [online]. Trade Invest Nigeria. Available from: http://www.tradeinvestnigeria.com/business_in_nigeria/ [Accessed 18 August 2012]. FRYNAS, J.G., 1998. Political instability and business: Focus on Shell in Nigeria, Third World Quarterly, [online]. Vol 19 (3), pp. 457-478. Available from: http://www.tandfonline.com/doi/pdf/10.1080/01436599814343 [Accessed 20 August 2012]. KLARE, M.P. and VOLMAN, D., 2006. The African ‘oil rush’ and US national security, Third World Quarterly. [online]. Vol 27 (4), pp. 609-628. Available from: http://www.tandfonline.com/doi/pdf/10.1080/01436590600720835 [Accessed 20 August 2012]. ONKVISIT, S. and SHAW, J.J., 1988. Marketing barriers in international trade. Business Horizons. [online] Vol 31 (3), pp 64-72. Available from: http://www.sciencedirect.com/science/article/pii/0007681388900109 [Accessed 21 August 2012].

RUGMAN, A.M. and COLLINSON, S., 2009. International Business 5th ed. Harlow: Pearson Education Limited. SHAH, A., 2010. Nigeria and oil. [online]. Global Issues Org. Available from: http://www.globalissues.org/article/86/nigeria-and-oil [Accessed 20 August 2012].

APPENDIX
The following questions were asked during the interview conducted:

What is Nigeria’s major export?
What is Nigeria’s major import?
What is the top Multinational Enterprise (MNE) or Foreign Direct Investment FDI in Nigeria? What do you think are the problems of international trade in Nigeria? What do you think about the current state of violence in Nigeria towards international trade?