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International Trade and Production

Free Essays of Economics The question of the impact of international trade on economic growth caused a storm of controversy and discussions at different stages of economic thought development. Various perspectives on the international political economy (IPE) differed in assessing the importance of foreign commercial activity in the economic development of countries. The representatives of mercantilism, one of the oldest IPE perspectives, considered domestic production and consumption to be the major sources of national economic growth. According to them, the state had to relate to the regulation of foreign trade extremely responsibly, to avoid the dominance of imported goods and the displacement of domestic producers. In this way, for the mercantilists, international trade and production had to be supplemented with the active protective national policy. Only greater participation of the state in international trade governing could provide conditions for economic advancement.

In the case of a liberal perspective, namely proper organization of production and international trade was intended to ensure the economic development of states. However, another aspect, which required consideration, was the appropriate distribution of goods to regions. Realizing the benefits of the international division of labor, derived from Smith’s theory of absolute advantages and Ricardo’s theory of relative advantages (Balaam and Bradford 35), liberal economists oriented on the establishment of principles of production distribution by the countries. The theorists of the liberal economy did not manage to achieve consensus on the part of the state in economic progress. Thus, monetarists insisted on the passive role of the government in economic life, and the Keynesians emphasized the important national contribution to monetary and fiscal policy (Balaam and Bradford 41). In comparison to mercantilists, liberal economists highlighted not only the place of the state but also the international division of labor as a factor of economic advancement. Furthermore, they stressed the significance of the technological development of manufacturing, as the basis for product competitiveness and growth of the economy.

The structuralism perspective on the IPE was to some extent continuation of the liberal course and its antagonist. Recognizing the necessity of building the world economic system to provide economic equality for all the nations, the early socialists had to pay attention to the principles of production and international trade organization. The state fulfilled the function of absolute adjustment of the national economic system. The technological level of goods manufacturing was also defined as one of the key factors of economic progress.

As an output, international trade and production are not the only sufficient conditions for economic growth. The works of economic theorists and the empirical results of the last decades show that the factors of the state role in the economy and technological degree of production define the level of economic efficiency of the country. For example, the analysis of the reasons for the economic advancement of China revealed that orientation on high-tech goods was of great importance to such an outcome. Moreover, the decision of the Chinese government to integrate its economy into the world economic system in the late 1980s provided circumstances for the rapid economic progress of the republic.

The Role of Technology in the Product Life Cycle

Technological innovations play a vital role in the modern economy, providing conditions for national prosperity and the change in products’ life cycles. The impact of new technologies on the reforms in the production cycle varies from the slight adjustment of the manufacturing process to the complete rearrangement of creation principles. The latest technological decisions suggest the radical rearrangement of the national economic system as well as the global economy in general. Therefore, there are four types of technological changes that affect the development of the contemporary economy: incremental innovations, radical innovations, changes of the technological system, and the reform of the techno-economic paradigm (Dicken 77).

The incremental innovations presume small progressive modifications of the existing product life cycle. Bringing minor changes to the methodology of production, such alterations can accumulate and subsequently lead to an industrial breakthrough. The radical innovations influence the whole life cycle of a single item. Additionally, the principle of innovational accumulation contributes to future intellectual progress. The changes in the technological system generate innovations in several sectors of the economy and become the basis for the economic development of the national industries. The reforms in the techno-economic paradigm are regarded as the most extensive transformations in the technology of goods manufacturing that are fundamentally changing the characteristics of the economic system and serve as a catalyst for substantial economic advancement.

Transferring of technological findings plays an important role in the spread of development over countries. The example of the prosperous countries that are paramount in economic growth in recent years shows the importance of the application of modern technologies. Since most of the innovations are implemented in the national innovation systems, the effectiveness of the measures of technological transferring defines the success of spreading development. The codified or formalized knowledge is much easier to transfer in comparison to personalized, tacit experiences. Furthermore, the efficiency of technological transferring is defined by the specific socio-technological environment within which innovative activity is performed. In this regard, the benefits from distribution of technologies and the spread of development depend on the nature of social, political, and economic institutions in each country; national intellectual tradition, which determines direction of the advancement of science as well as an agreement on the establishment of peculiar areas of innovation (Dicken 104).

In the globalized society, multinational corporations take a leading role in the exchange of modern technologies between nations. Being supranational entities, organizations serve as a method of the informal relationship between the states. Thus, this channel of technological transferring became especially useful for developing countries, which built new industries based on technology acquired from these companies. The example of the Indian automobile industry, which will be discussed further in the essay, shows how the correct application of foreign technological solutions can be a catalyst for the growth of the national economy.

International Monetary System

The function of the international monetary system and the reason for its implementation is ensuring the stability of foreign trade. Since the latter is an important factor for economic growth, significant irregularities in this process can induce the emergence of crisis tendencies in the world economy. The good international monetary system should guarantee the fulfillment of three key functions: the function of adjustment, the liquidity provision, and the provision of stability and confidence among the members of the international trade process. The international monetary system (IMS) must adjust the imbalances in the balance of payments of the states; keep the exchange rates relatively fixed to secure international trade, and be able to provide countries with the reserve assets in order to correct their balance of payments deficit. In this case, the IMS served as an efficient tool for the US equilibrium of payments deficit management during recent decades.

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The first international monetary system was the gold standard one (Balaam and Bradford 162), which determined the fixed exchange rate under the gold standard for international trade. Hence, the realization of this approach allowed to avoid adverse currency fluctuations and to provide conditions for the stability of foreign trade. The gold standard was abolished because it limited the opportunities of monetary policy to strengthen national economies and created privileged positions for the countries with large gold reserves. Therefore, the inability to overcome the consequences of the First World War at the expense of this system led to its elimination.

The Bretton Woods system, which existed from 1944 to 1973, defined new principles of the international exchange rate regulation. Back then, national currencies were not directly linked to gold; their value depended on the ratio of dollar to gold. The establishment of the International Monetary Fund (IMF) was supposed to guarantee the quick stabilization of the national balances of payment and exchange rates. The collapse of the Bretton Woods system as a result of dollar devaluation in 1973, originated the current Floating Exchange Rate System.

The Floating Exchange Rate System destroyed the principle of par values between home and foreign currencies and lifted restrictions on the exchange rate fluctuations. Thus, these changes made countries modify their domestic monetary systems to support exchange rate interventions and guarantee the stability of international trade. The Floating System allowed state governments to cooperate in the foreign exchange markets and coordinate their domestic monetary policies for the sake of common prosperity. Besides, the process of payments adjustment balance became more simplified, including the instruments of IMF credits, coordination between governments, and unsteadiness of exchange rates.

With regard to the perspectives of modern IMS, it is difficult to define possible changes that can be introduced in it. In general, the Floating System contains all the features of good IMS. At the same time, it is not common for open economies because the flexible rates are quite inflationary and can cause structural unemployment. Overcoming these limitations of the existing system can be a direction in its future development.

The Security Concern for the Global Economy

The World Economic Forum 2016 compiled a list of security threats to the global economy, which are likely to occur in the coming years. The most significant of them, which already affects the world and can bring huge damage in prospect, is the issue of mass involuntary migration. Though the problem was already relevant at the initial stage of globalization, which was accompanied by the free movement of labor, this issue is felt most acutely right now. Aggravation of the military-political situation in the Middle East and Africa leads to the uncontrolled migration of the population from disadvantaged regions to the more developed European states. For the American continent, the same tendency can be seen in the process of illegal migration from Mexico and many other countries to the US.

The growing rates of migration cause the crisis in the labor markets of hosting states. The formation of excess of unskilled labor induces an increase in supply in the labor market. Unprofessional workers who are willing to work for lower wages comparing to local people, reduce the level of employment in the country and average salaries. Except for the deterioration of living conditions in the developed areas, this situation generates a decrease in consumer demand and worsening of the environment for business activities. Hence, another problem of the world economy emerges, namely the issue of global unemployment. Under these circumstances, it can be said that globalization did not succeed in attaining one of its targets – the global income equality for all the nations.

It is interesting to consider the modern state approaches to the resolution of this problem. The non-controlled migration to the US remains relevant for almost a century, and no other measures but administrative limitations of migration could be implemented. The matter of migration in the United States is so urgent that it has become one of the arguments in the last US presidential elections. For the EU region, the state of affairs is different. The members of the union managed to overcome the problem of labor migration before 2012. The policy of controlled chaos, imposed by the United States in the Middle East to prevent the consolidation of Islamic countries into a single caliphate led to incitement of permanent conflict in the region. According to many experts, the situation in the East has already outgrown the stage of unmanaged chaos, in which it is no longer possible to control the encounter. The European countries were not able to provide the measures for crisis regulation. Merkel’s decision to pay Erdogan for preventing refugees from reaching the territory of Europe indicates the despair of European leaders in an attempt to tackle the issue.

To overcome this obstacle, firstly, it is necessary to extinguish the source of conflict in the East, which is now in Syria. All the developed countries should support secular regimes in the Middle East, which will become a barrier to the spread of Islamic fundamentalism in the region. Moreover, the abundance of information about the campaign of terrorist groups on the Internet declares the lack of concern for this matter. In addition, the Western countries should launch a program of economic recovery in the Middle East, similar to the Marshall Plan after World War II. The governments should provide conditions for the early return of refugees to their native areas in order to reduce the turmoil in the labor markets of the developed world.

Good and Bad Outcomes of the MNC

The practice of multinational corporations (MNC) operations around the world seriously raises the question of the usefulness of these organizations in various countries. Since the key motivation for the MNC is a high level of profitability due to the presence in a separate market, many experts consider corporations to be immoral institutions that only damage the national economy and ecology. The discussion of two situations in which the MNC caused advantages and harm to states, makes it necessary to appreciate the true nature of establishments.

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The MNC played a vital role in the formation of the automobile industry in India. After the liberation of the country in the middle of the twentieth century, the government identified the priority of the gradual development of the automotive business, as a catalyst for economic growth. The industry had to ensure diversification of production, including environmentally friendly transport, and vehicles based on energy-saving technologies. The biggest national producer in this field, the Hero Group, gained various advantages from cooperation with the MNC. Without their own technological progress and manufacturing capacity, Indian companies could achieve success only at the expense of foreign capital and technology. The MNC has occupied the new market in India and provided conditions for the efficient advancement of commercial enterprises. Hero Group built a mutually beneficial relationship with firms such as Honda, Bajaj Auto, TVC Motor, Yamaha, and Ultra Motor. All of these MNC contributed to production capacity in the framework of modern technologies. In this case, the MNC has transferred everything that was necessary for the prosperity of the new industry – capital investment and technological progress. It would be difficult to imagine the development of the Indian automotive business without cooperation between corporations and Indian companies.

Another example is also connected with the activity of the MNC in India, but it considers the consequences of irresponsible performance of organizations in the territory of developing countries. Unfortunately, it should be recognized that the MNC usually resort to abuse of the opportunities offered by globalization and openness of world markets. The operations of Coca-Cola MNC in Southern India brought much harm to the ecological situation in the region, the elimination of which will require huge costs from the state budget. In March 2000, the Hindustan Coca Cola Beverages Private Limited (HCCBPL), the Indian subsidiary of Coca-Cola, began its work on the creation of the famous drink at Plachimada, in the southern state of Kerala. The latter was mainly agricultural that is why the well-being of residents and economic viability depended on ecological balance in the area. Coca-Cola adopted environmentally harmful production technology, which led to the contamination of groundwaters and deterioration of the living conditions of the local population. The MNC managed to continue its activities until 2005, then the government prohibited Coca-Cola to use subsoil waters during the production process. The region is still experiencing negative results of the presence of corporations and counts on the costs of restoration of ecological balance in the state.

Therefore, Dicken’s statement appears to be just and points to the need for strict state control over the companies. Only in this case, the excellence of benefits will be achieved overcoming deficiencies with regard to the existence of the MNC in the market.

Poverty and Inequality

The issues of poverty and inequality were relevant to the global economic system since the period of the industrial revolution when the welfare of inhabitants of the Western countries began to improve in comparison with the rest of the world (Dicken 479). Poverty significantly reduces the quality of life in less developed states and creates conditions for the abuse of possibilities provided by the MNC. It also determines the occurrence of the main security issues of the global economy, such as mass involuntary migration that was mentioned earlier. The inability to enforce the decent standard of living in underdeveloped countries induces the need to migrate to more prosperous regions, undermining their economic potential. At the same time, the low level of literacy and education in the states with a high poverty rate does not allow them to achieve the possible level of economic growth. In this regard, the penury establishes serious limits to the progress of the global economy in general. The demand to obtain the lowest probable profits in the less developed countries prompts the waste of natural resources and environmental destruction. The example of the Chinese economic miracle shows that combating poverty requires considerable sacrifices, including the predatory use of natural resources and environmental pollution. Only solving the problem of mass impoverishment in China enabled the introduction of modern production technologies.

The matter of income inequality became a real threat for all the nations, including the developed ones. In the US, the revenue disparity level has reached the point that even the Obama administration emphasized the need to resolve this contradiction. The importance of tackling the issue of inequality for the global economy is that it limits the potential rate of economic growth.

Globalization contributed to the existence of these points in the modern world. Although one of the reasons for globalization plan implementation was to provide conditions for liquidation of poverty and reducing the economic unevenness of countries and peoples, the real situation is different from the original theses. In fact, the income gap between the richest and the poorest states increased from 3 to 1 in 1820, from 92 to 1 in 2007 (Dicken 482). Moreover, globalization served as a catalyst for the occurrence and amplification of the transnational capitalist class (TCC). According to Peter Dicken, these actors of the world economy are advantageous due to the existence of penury and inequality. With access to the markets of developing countries and those with low living standards, transnational corporations can gain the necessary factors of production on more favorable terms. In addition, the state as a key provider of social benefits and guarantees of social equality is put in terms of the need to neglect the interests of the population to attract foreign investment.

As an output, impoverishment, and unevenness are tightly integrated into the structure of the modern economic system and are an integral part of globalization.

The Consensus between Production and Environment in the Globalized Economy

The feature of contemporary globalization is the declaration of aspirations to improve living conditions for the entire population of the planet. The UN organization compiled a list of Sustainable Millennium Development Goals, which included the main aims and directions of development of the world economy. Thus, this list contains the requirements for global equality, food services, healthcare, protection of the environment and human political rights. All of these requirements for the advancement of the society are extremely attractive and promising, but the reality makes its adjustments to the implementation of the UN plan.

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The nature of the challenge between the contemporary material needs of the economy and the demands for equality and environmental conservation emerges from the fact that the current technology of goods production cannot avoid the necessity in the elimination of natural resources to manufacture items (Dicken 456). Even the newest technologies of waste-free production cannot reduce the level of waste to zero. In this case, the contemporary production capacities do not just create the new value but also destroy the old one, which used to be raw materials. The introduction of efficient non-waste industry measures allowed the developed countries to reduce the negative impact of manufacturing on the environment. However, for the developing states, the problem remains relevant. The horrific level of air pollution in China outlines the importance of the discussed challenge. China and India occupy the leading positions with regard to the degree of premature deaths due to urban atmosphere contamination in the world. The analysis of the aforementioned instance of the arbitrariness of the Coca-Cola corporation in India, which led to groundwater poisoning in the large area and incurred risks to the agricultural region, indicates the need for a radical revision of the modern system of industrial relations. Otherwise, it is impossible to consider the ideas of the Sustainable Millennium Development Goals, as the real aims instead of simple assurances to society.

Furthermore, the issue of income inequality imposes limitations for the implementation of the UN objectives. The organization proclaims the creation of social welfare, which provides equal rights in the spheres of healthcare, education, employment, and protection of individual freedoms. Nevertheless, growing penury and unevenness will not allow the states to achieve these goals. The current industrial relations include the necessity of poverty presence to offer low-wage jobs to unskilled workers. Under the circumstances of the globalized market, governments impose rules under which international corporations get all the privileges of new markets establishment. The soft fiscal policy for the MNC is achieved by reducing social spending and deteriorating working and living conditions in the developing countries. The companies also get the privileges of predatory exploitation of national natural resources. Even if the authorities subsequently apply sanctions against these organizations, the damage has already been inflicted and is often irreversible. Hence, the rules of cooperation between corporations and governments should be reconsidered to create real conditions for the implementation of the UN’s Sustainable Millennium Development Goals.

Markets versus States

The process of economic globalization advanced international corporations as the key players in the economic arena. In the modern world, firms are used to crowding out the state in connection with the absence of attachment to a particular location and characteristics of natural resources. The differences in the challenges posed by the country and the establishments determine their constant contradictions. At the same time, both of these subjects of the global economy are closely interrelated and cannot exist separately (Dicken 223). The nations use the market potential to introduce material values and guarantee employment for the population. On the other hand, the MNC exploit the state as the infrastructural foundation for their activity.

In comparison to the previously existing national companies, which were based in one country and followed their foreign economic policies only in the form of export and import of finished products or raw materials, the present-day enterprises obtain more extensive business opportunities around the globe. For the previous national firms, the influence of the state was greater, and their cooperation focused on the considerable similarity of interests. The government is usually interested in raising the standard of living and welfare of the population. Therefore, national firms created all the conditions for such a state of affairs, offering jobs and decent wages. The companies, operating on the territory of one state, were vulnerable to the requirements of the fiscal and monetary policies of the country. Nowadays, corporations have gained more considerable autonomy in the selection of the preferred markets for their activities. It is already possible to outline the bargaining processes between the MNC and the governments, which were difficult to imagine before the period of globalization.

Comparing the positions of the state and the corporate entity in resolving contemporary problems of globalization, the tasks of each should be considered. The authorities desire to improve national economic growth and the level of population employment. It is interested in the development of new production technologies inside the country and aims at achieving the fair return on local operations of TNCs through taxation policies. At the same time, the MNC devote all the efforts to maximize their profits and shareholders’ value. They claim that the prospects of the markets of different countries are concentrated on business progress and are not tied to a particular state in terms of technologies. Milton Friedman defined corporate objectives most accurately. According to his research, firms have to act correspondingly to the interests of their shareholders. In this way, the expenses of the company on public needs, in order to ensure tackling the issue of globalization, are considered irrelevant because they do not bring direct advantages to shareholders. Opposed to Friedman’s opinion, John Mackey stated that the organization should consider the benefits of all stakeholders, including society, as its task.

The current experience of the MNC activity in the sphere of globalization issues settling shows that most of the companies share Friedman’s view on corporate social responsibility. However, the existence of such companies as “Whole Foods” enables a more mutually beneficial and attractive way of communication between the MNC and the public.

The Future Decade of the World Economy

The rapid changes in the political and economic conditions of the modern world make it possible to speak about the transformation of the world system that will occur in the near future. The failure of the globalization paradigm to create circumstances for the realization of the UN Sustainable Millennium Development Goals leads to a reduction in the number of supporters of this idea. The failure of Obama’s cabinet to implement programs of transpacific and transatlantic partnership exhibits reluctance of most states to participate in international trade on the basis of the open market rules, which threaten the hegemony of corporations. Brexit and the declaration of several European countries to perform identical actions indicate that the globalization system is bursting at the seams. The gradual consolidation of political power in the hands of the pragmatists in Europe, the abandonment of multiculturalism policy, as well as the results of the United States elections, assert that the core ideology of the next decade will significantly differ from the one available at the moment. The International Monetary Fund states that hegemony of the free trade ideology is in danger nowadays.

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The demographical changes in the EU, caused by the influx of migrants from the Middle East, can cause its weakening as a global hegemon. It may not happen in the next decade, but it will occur if nothing changes. The US will not lose its leading positions around the globe. However, now its status as the sole world power may falter due to the dawn of China and India. In Eurasia, the Russian Federation declares the claims for post-Soviet territories and actively participates in the conflict in Syria, highlighting its recovery from the collapse of the USSR. The ideology of interests of national preferences over those of the open market will probably take the lead in the world.

With regard to the dominant institutions of the next decade, it is necessary to outline the importance of international economic and trade unions. Since international trade plays a vital role in the economic growth of the countries, folding globalization will not induce the destruction of the institute of international trade, but only its reformatting. The increase of power of the international economic unions, such as BRICS or SCO, is pushing the idea of the transition of foreign trade in the preferred format of commercial affairs between the members of such unions.

The IPE perspective, which seems to be paramount in the following decade, is the developmental state model or mercantilism. Hence, this conclusion may be drawn after the statements of the modern US and European political elite, as well as applications of leaders of the largest global economies.

The end of time, which was supposed to come after the collapse of the USSR and socialistic camp, did not happen. The world still possesses a large number of economic and political contradictions that serve as a catalyst for technological advancement, the creation of regional alliances and their economic growth.

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