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Advantages and Disadvantages of International Trade


International business is the core theme in executing business in current time of globalization. In the competitive environment, companies are fighting at global level. In international business a business can take part in either of the two ways such as import or export. Transfer and export will be the two basic and main ways of conducting the business enterprise (Dunning, 2007). Every time a company engages into the international business, there are lot many factors which impact the business enterprise. Hence there are benefits and drawbacks of both transfer and export. Considering this view, this project report addresses the critical research of two key ways of developing international business and respective benefits and drawbacks. In addition to this the assignment article also discusses the international business and free trade (Fortanier, 2008).

International Trade:

International trade is also known as global trade where in fact the dealers can exchange the products or services and uncooked material over the edges. International trade was initially began by the professional revolution in US and distributed throughout the world in the late 18th and early on 19th hundred years. A major change in the communication, transport and logistics has evolved the way of doing international business and simplified the process. The technological improvement and change in the communication and travel facilities has surged the international trade in the 20th century. The present form of international trade has been transformed in to the outsourcing and multinational companies(Gupta and Govindarajan, 2008). A remarkable surge has been observed in the trading amount from the middle of 20th hundred years. In the entire year 1928 the total export value in the world was approximately $31. 7 billion while after 70 years this amount is $4, 215, 000. 2 billion. To be able to maintain the steadiness and equilibrium among the countries the forming of World Trade Business came into existence (Hennart, 2004). The organization not only solves the trade things but also support the expanding countries in export their product and service to international countries. The commanding position in WTO is remaining with G-7 countries such as US, France, Germany, the united kingdom, Italy, Japan and Canada. The organization regulates the dynamics of international trade which also support in preparing the trade agreement between the nations. You will find few trade theories which supply the overall view of international trade as talked about below:

Absolute Benefits Theory:

The absolute benefits theory provided the view about the capability and control in conditions of competitive surroundings for international trade among the list of countries. According to the theory, if any country A can produce the products and service of same quality at less expensive of resources than the other country B then country A has absolute competitive benefit over country B. also for other commodities country B can hold the absolute competitive benefits over country A. the fantastic economist Adam Smith has put this theory onward to comprehend the international trade (Johanson and Wiedersheim-Paul, 2008).

Comparative Edge Theory

Comparative advantage theory is the extension of absolute advantage theory which explained that a country should produce only those items in which it has skills and specialization for the purpose of growing the comparative benefit in terms of resources. To be able to govern the design of trade the comparative factor endowment has a key role ((Jones, 2006).


Heckscher-Ohlin Model

Heckscher Ohlin theory is some what different from absolute edge and comparative edge theory since it emphasizes only on the creation factors in which the company has expertise and from that produce the products. This theory mentioned a country should export only those goods that happen to be abundance in the united states and for which the method of production factors can be employed more intensively. On the other hand the united states should import only those goods where the country is less able for its method of production factors and also unavailable in abundance (Nelson and Winter, 2007). So that it has been observed that the factor of endowment and relative variation has key role in the pattern of international trade. As against this assertion, Wasily Leotieff analyzed this theory empirically in which he discovered that the Hecksher Ohlin theory may not always be true. To get this assertion he mentioned that the export in US is for the commodities that are labor intensive however the country has plethora capital which example is famous by the name as Leontief Paradox ((Jones, 2008).


Specific Factors Model

The specific model theory stated that for producing the products and exports these to other country, the capital should be set for the brief run and labor should be mobile. It would help to reduce the price tag on creation i. e. in the event the price tag on a item increase then the company an get the benefit by using the labor which is offered by low priced. This model is suitable limited to some specific sectors (Easterly, 2008).

Gravity Model

As per the gravity model theory, the pattern of trade between the countries is affected by the length between the countries and these findings are also recognized by the economics (Hennart, 2007).

International Equities:

International equities will be the assets of the united states in which the country transact with the other country. In the international equity a country has increased or lesser value transaction on the other country. You will find few theories comes under international collateral which provides the better idea to understand the international equity. These theories are given in the following section (Hennart, 2007).

Balance of Trade:

Whenever, a country export to other country or import from other country, then the difference between the export and import is recognized as balance of trade. In case the export of goods is higher than the import of goods then the various between your export and transfer is positive and said that the country has positive balance of trade. Alternatively if the export is significantly less than the import then the balance of trade will be negative and this situation is named trade deficit (Casson, 2008).

Balance of Repayment:

Balance of payment is the record of all the transaction which has been done by the country with remaining world. The exchange may include the import, export, financial capital, goods of services, and the financial exchanges of the funds. The balance of repayment is prepared in one currency and usually prepared for specific period as like the financial calendar year of an company. The receipts of loan, investments receipts and export resources of funds are saved as surplus or positive items. On the other hand the use of funds as like the ventures, import and payable are recorded as negative or deficit items (Dunning, 2006). There has to be balance when all the components of balance of repayment are noted as like balance sheet of the company. Preferably balance of payment is the difference between your current account and capital account and the total amount item are added or subtracted depending on the value it retains. There is a point of matter for the countries having deficit in current consideration since it creates the permanent liability for the country (Bartlett and Ghoshal, 2007).

Advantages and Cons of International Trade:

There are some advantages and disadvantages of international trade for both export and transfer.

Advantages of Exporting:

One of the major benefits of export is the ownership edge which is specific to the firms' international experience, advantage and capacity of the exporter to either develop the differentiated product or low cost product with in the ideals chain (Hertner and Jones, 2007). A combo of investment risk and market potential is known as the location advantage of the particular market combination. In order to retain the core competencies within the organization and stitching it throughout the country without retaining the license, selling or outsourcing is the international benefits in export (Amatori and Jones, 2003).

Some of the organizations having lower degree of ownership advantage can do not enter the foreign market segments. In case a company's products and company's possession outfitted with the international edge and ownership edge, the admittance can be produced through low risk model known as exporting under the eclectic paradigm. There exists low investment requires in exporting of goods than the other methods of international trade and expansion such foreign immediate investment. Some how it is regarded that the low degree of risk lead to, lower degree of rate of return than most likely the other settings of international trade (Khanna, 2007). On the other hand the usual return on international trade in export sales might possibly not have greater probable but also you will see no risk. In export of goods the managers are permitted to exercise the many operational control however it doesn't have the option over the control of marketing activities of the company. The finish consumer of exported goods is a long way away from the exporter though the various intermediaries can mange the risk (Jones, 2008).

Disadvantages of Exporting:

The exporting of goods is specifically difficult and disadvantageous for the tiny and medium size businesses having employees less than 250. The deal of services and goods in to the foreign market is problematic for them rather providing the home market. A lack of understanding of different languages, difference in culture, exchange legislation and trade laws having the major effect on exporting the goods for SMEs. In addition to this the staff relationship and strain of resources is a significant block of exporting the goods. Despite this drawback, a few of the SMEs are still exporting however two third of these sold-out to the international marketplaces (Jones, 2008).

In addition to this there are a few major disadvantages highlighted in the export of goods such as financial management, communication technology improvements, and customer demand and management blunders. To be able to minimize the risk of transaction procedure for exporting the products and exchange rate fluctuation, it is essential to have more capacity for controlling the financials for coping in the work (Nelson and Winter, 2007). Customers is now able to connect to the suppliers due to the recent development is the communication technology has better the way of purchasing goods, since the communication is mush cheaper then what is was two decades before. It leads more transparency in transfer and purchasing of goods and distributors are in charge of following the real-time demand for submitting the business deal details (Hennart, 2007). The customers are becoming advance because of the improvement in the technology and they demand more support and services from the vendor such as startup and equipment assembly and startup, delivery service and maintenance that are difficult for the exporter to provide. There might be some pitfalls in the organization occurred by some of the management blunders such as oversea a distributor, an agent or chaos in the global firm (Johanson and Wiedersheim-Paul, 2008).

Advantages of Importing:

Importing raw materials and goods is one of the paths of increasing the income. There are range of benefits in importing the goods, such as high quality, low prices, and benefits related to the international trade. An importer can have the comparative advantage this means lower prices (Jones, 2006). Also the importer can have the much cheaper products from the foreign market scheduled to low labor cost, low taxes etc. in conditions of quality, the importer can have the higher quality goods and produce the finished goods with high quality and increase the business revenue margins. In some countries, government provides the support to the importer for producing the trade relationships (Nelson and Winter, 2007).

Government supplies the information of the manufacturers and manufacturers in the international country so that the importer can buy the high quality and low price goods. Also because of the government participation reduces the exchange risk. An importer can usage of the regionally exclusive resources and cheap labor for producing the products. These resources are needed in the developing process which may have customized skills and can be acoustics in certain countries. For instance in electronic digital items, Japanese people are highly useful and manufacturer in UK use the labor from Japanese market for producing goods. The importing of resources includes everything starting from labor to technology (Fortanier, 2008).

Disadvantages of Importing:

There are numerous governments and economists who assume that the importing goods have numerous cons. For instance importing of goods could lead the erosion of the local markets and nationwide economies specifically when there may be trade deficit occurrence i. e. the transfer is greater than the export. A number of the goods like autos; appliances lead a higher level of domestic automobile and electric market segments and also lack of jobs in the individual markets (Hennart, 2007).

Some other problems can even be increased due to import of goods such as turmoil in the local values because of the acceptance of interpersonal values. The domestic industries can also be crippled because of the transfer of the countries where the salary are low and the domestic industries are unable to compete given that they cannot reduce their prices of goods than the expense of goods and also they have the obligation to the staff member union (Hertner and Jones, 2007).

Free Trade Idea:

The concept of free trade was presented in the machine to benefit the country and improving the health of poor by giving them high quality and cheaper products. However as an economist, in my judgment free trade is erosion the domestic players for example if UK authorities reduce the import duty on sugar then the demand for the imported sugar will increase and domestic player will never be able to compete with the international player (Johanson and Wiedersheim-Paul, 2008). Alternatively the financial category argues that free trade promote the environmental degradation, supporting the kid labor, income inequality and wage labor, slavery, harming the countrywide protection, enforcement of ethnic change and accentuating the poverty in the united states.

The economists also argued that the importing goods under free trade are opposed by the home industries due to rise in competition in terms of product quality and cheaper prices (Nelson and Winter, 2007). A maximum exploitation of employees due to the free trade is also compared by the socialists. Free trade generally do not decrease the poverty or improve the condition of working school in the united states but frequently make them more poor. It also helps the colonialism and imperialism in the country. On the other hand I assume that in free trade consumer could gain more than the industrialists and the local producers are more likely to mobilize their products without lifting the tariffs (Jones, 2006).

Conclusion and Suggestions:

The competitive business environment enforces the businesses in both the international and local markets to sustain their business and continue to be competitive. However depending on need and probable of the business enterprise, it is essential to understand if the company should indulge in to the export or transfer activity (Gupta and Govindarajan, 2008). It is recommended to the firms specially the medium and small companies to increase their business probable at home market first and then expand in to the international market collaboration, jv or business collaboration. Prosperity in the united states can't be achieved through protectionism since it does increase only the poverty and also do not protect the local industries or careers but damage the export business and market sectors which has opinion on imports (Hennart, 2007).

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