Kangwon National University

Kangwon National University

Department of International Trade

World Economy

Mid - term exam (take home)

2nd semester 2015

Professor: Hyun-Hoon Lee (이현훈)

Bc. Eliska Kozakova, Uni no. 201519513

Department of International Trade

The 28th October 2015, Chuncheon, South Korea

1.  Explain how fast international trade has been growing in the world. What are the reasons for fast expansion of international trade? Explain benefits and costs of international trade. Explain pros and cons of globalization.

Industrial trade is not new in the world history. The barter of goods and services between people is an age-old practice. International trade activities took place already in ancient times where for example based/according to Periplus Maris Erythraei (Greek travel manuskript written in the 1st century CE) used to exist extensive trade between Romans and the Indians. But as an international trade, in the means of exchange between members of modern nation-state, is closely related to European Middle Ages and lately and largely begin rapidly expanding with the industrial revolution till. (1,2,3)

International trade, considered as the exchange of goods and services between countries around the world, has been growing rapidly true recent decades. Giving some background data of the last thirty years In the article "Trends in international trade",World Trade Report 2013 published by WTO (World Trade Organization) is staited that: “According to world trade statistics, the value of world merchandise exports rose from US$ 2.03 trillion in 1980 to US$ 18.26 trillion in 2011, commercial service growth even faster over the same period from US$ 367 billion in 1980 to US$ 4.17 trillion in 2011. “ From this based data, world merchandise trade increased more than four times between the years 1980 and 2011. (3)

This fast expansion is contributed by many factors. Mainly starting from the 19th century in the era of technical advances having an effect on the development of communication, transportation sector and liberalization. All of these factors together had an achievement on the reduction in trade barriers. Nowadays we consider the fast growth of international trade to the development of internet, digitalized economy and the establishment of international trade organizations. (4)

In my opinion, another reason for this fast expansion of international trade could be the world globalization and the closely interconnected system of the world economy. The rise of international trade could be as well caused by the world’s enlargement in number of population where as more people there are, higher the demand is and more trade is needed. Human global problems such as aging population, lack of natural resources is opening new area of opportunities and new areas for trade.

Buying and selling in foreign markets offers potential for businesses to develop and expand opportunities.These opportunities can be either beneficial of costly. The most benefits of having an international market are in rapid economic expansion, new business opportunities, and wider range of selection of goods. As negatives we could see the widering gap of inequality and strong competition. (5)

Speaking about globalization and its benefits and disadvantages, first we need to define what we mean by the word globalization. “Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven byinternational tradeandinvestmentand aided byinformation technology.” (Globalization 101, 2015). As the most benefit of globalization is the access to other markets and its collaboration, free trade lowering the countries barriers and promoting global economical growth. Another benefit of globalization is making competition between countries. Due to competition the price of products are driven down. Other big advantage is in the free movement of labour. In a globalized world, workers can more easily move from one country to another to market their skills to employers and contribute to the economy. (6,7)

Many features of globalization are beneficial, but there are others that can result in problem and have the negative effect. One of the disadvantages of globalization is seen in the income disparity among different countries and people. Certain nations benefit greatly from the current landscape, as others suffer. Smaller and less developed countries are sometimes struggling with protection that they need in order to grow and take the benefits what globalization can provide. Second downside is seen in the negative impact on environmental. By producing and consuming more and more goods can have a devastating effect on the planets environment. Finally, as globalization is spreading widely in the world countries are at the risk of losing their cultural identity. (7,8)

1. Explain international trade in terms of global value chain (GVC). Explain the role of foreign direct investment and trade in intermediate goods for GVC. Using a commodity example, explain GVC.

“The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its end use and beyond.” (Global Value Chains, Duke University) By my words Global Value Chain (GVC) can be explained as a set of activities which are brought together to compose a product or service that is beneficial for the market. This process includes activities such as research and development, design, production, marketing, distribution and support to reach to the final consumer. (9)

International Trade is closely connected to global value chain. Big multinational companies don’t contain their activities within single geographical location but are spread in more countries. The transfers and trade of goods and services between each country is very important. For example the production of Apple’s iPhone is spread worldwide and the international trade here is really important. Single parts are composed in many different countries and then they are assembled in China and then transported as a final product to USA.

The trade in intermediate goods for the global value chain is increasing its importance in the last years. Intermediate inputs which are the parts and materials imported to make products for consumption domestically and abroad are rising due to the progress of organizational innovations, lower trade barriers, progress in informational and communication technologies. High labour costs and heavy regulations in rich countries have also helped to shift the wave of international trade in intermediate goods towards developing countries. Intermediate inputs now represent about three-quarters of the imports of large developing economies, such as China and Brazil. (10)

One of the main drivers of globalisation and of the creation of global value chains are Foreign Direct Investments (FDI) mainly by multinational enterprises. Both inward and outward foreign direct investments are essential to many economies. For a multinational company it is much more beneficial to invest in a new establishing company concentrating on manufacture process and production in a developing country where is cheap work force then to invest in its own country. (11)

3.  Explain pros and cons of regionalism. Explain Trans-Pacific Partnership. What will be its impact on international trade and investment?

Regionalism in the means of international relationship is an expression which express a particular identity and shape collective action within a geographical region. The benefits of the regionalism could be seen in the elimination of barriers among jointed countries, free trade area among member states, free movement of labour and capital. As an union the member states together can have a bigger power in bargaining with other non member states. The most advantage type of economic integration is economic union. (12,13)

The costs of regionalism can be noted in not having enough power of one smaller country in comparison with other member states who are taking the lead. Some experts say that regional economic groupings are undesirable because they impose unnecessary economic costs and can detract attention away from multilateral negotiations. From my point of view, regionalism can also have a bad effect on the countries culture which can extinct. The laws and rules of regionalism among collaborate countries have to be clearly defined in order to prevent misunderstanding and future conflict among countries. (14)

Trans-Pacific Partnership (TPP) is a free trade agreement between 12 Pacific Rim countries concerning a variety of matters of economic policy. This agreement was negotiated 7 years before it was agreed on 5 October 2015 by 12 countries: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. This agreement should “promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in our countries; and promote transparency, good governance, and enhanced labor and environmental protections.” (Summary of the Trans-Pacific Partnership Agreement, 15)

The impact on the global market of TPP will be mainly in eliminating or reduction of tariffs and non-tariffs barriers across the trade in goods and services. It will address new trade challenges. TPP will include “new elements that seek to ensure that economies at all levels of development and businesses of all sizes can benefit from trade.” Another main feature of TPP is the set of platform for regional integration. (15)

TPP is assumed to be the largest, most ambitious free trade initiative in history. It is expected comprise one-half of global gross domestic product (GDP) by 2050. (16)

From the perspective of the TPP partner countries, this agreement has a lot of benefits especially concerning international trade and future investments. The benefits are seen in the countries economy growth. In the elimination of taxes on various goods which will support job creation and create opportunities to sell in the world’s fastest growing markets. TPP will make easier for entrepreneurs, farmers, and small business owners to sell products abroad by eliminating taxes, other trade barriers. The agreement also promotes collaborative work within the areas of education, science and technology, research, and innovation. The ultimate goal is to achieve open trade and regional integration across the region. (15,17)

TPP has some threats. The most serious are seen in the lack of transparency where countries have not released any texts or negotiating positions to the public and the lack of information about intellectual properties. (24,25)

TPP is expected to be the largest trading bloc. This could be a big harm to other non member countries in the perspective of international trade. The flow of goods and services from a non member country to a member country could be issued much harder and in a costly way due too strict trade barriers. For the non member countries it could be almost unachievable to make a trade agreement with a member country. As well there can be an increase of income disparity within non member and member states.

4.  Explain why we need sustainable development? Critically explain green growth and inclusive growth strategies for sustainable development. Explain some examples of green growth strategies and of inclusive growth strategies. Critically explain Sustainable Development Goals (SDGs).

It is really important for our world to consider the sustainable development. This stable development is meeting the needs of “human goals while maintaining the ability of natural systems to continue to provide the natural resources and ecosystem services upon which the economy and society depend.” We should take inconsideration what effect we are having on the world and what can we do to maintain the development of the world and not causing it so harm. What can we do in order to satisfy our needs but not destroy the world. To think about these questions now is really important and its going to be more crucial for our future generations. (18)

Green growth is considered as an economic growth that uses natural resource in sustainable way. (22)

The world is going through a rapid development and economic growth especially in Asian and Pacific countries. It is really essential to think about the resource constraints and climate change for our future life. Therefore the countries need to shift quickly towards new growth pattern which can be seen in the green growth. Green growth is promoting resource efficiency, low use of carbon and low emission strategy. All this can have a big business potential in investments, innovation and job creation. Turning green into business opportunity could be the future way for us to fallow. (26,27)

For example in Korea is developed National Strategy for Green Growth (2009-2050) and the five year plan which both take in consideration the policy for green growth. In the long term National Strategy for Green Growth has the aim to:

1)  Promote eco-friendly new growth engines,

2) Enhance peoples’ quality of life and

3) Contribute to international efforts to fight climate change. (23)

Inclusive growth is a set of policies that are design to achieve social equity growth. Its aim is to find some balance between social equity and economic growth. It is a really important issue for the world. To have a sustainable growth pattern of the world, it has to be inclusive. We have to focus on reduction of inequality among people by investing in health, education and infrastructure, eradicate corruption, and distribute the income fairly. To have an strong economic growth of a country, there is the need to lower the income gap between rich and poor so the people could have more equal right. The inclusive growth is really significant for today world. Without it we can’t move further. (28)

Sustainable Development Goals (SDGs) known as the Global Goals are a set of global goals relating to international development. They are build on the Millennium Development Goals (MDGs) which were established in the year 2000 and include eight anti-poverty targets to be accomplished by the year 2015. On 25 September 2015 at the United Nations Sustainable Development Summit the world leaders of 193 countries adopted the “2030 Agenda for Sustainable Development, which includes a set of 17 Sustainable Development Goals (SDGs) to end poverty, fight inequality and injustice, and tackle climate change by 2030.” (19, 20,21)

In comparison with the Millennium Development Goals with 8 goals, SDGs have 17 goals. This can be seen as a negative in not having these goals limited in a smaller amount and to be easier to remember and to communicate. Then there is a question if it is action oriented with so many goals. In my opinion a smaller number of goals would be more effective and easier to understand. But on the other hand the MDGs with its 8 goals were mainly focusing on health, poverty, gender equality and environmental sustainability, whereas in 17 goals of SDGs, which are more further developed the focus is more oriented towards sustainable and inclusive economic development, environmental protection and as well on health, education, poverty, hunger, gender equality. The SDGs are known to be designed to finish the way of MDG. (29)