S6 UNIT 13
Overview
By the end of this unit, learers be able to evaluate the impact of trade and commerce on the sustainable development of different countries in the world.
TRADE AND COMMERCE IN THE WORLD
13.1. Definition, types of trade and factors influencing international trade.
13.1.1. Definition of key terms
It is the activity of buying and selling or exchange of goods and services within a country or between countries. Trade also occurs between two individuals through the exchange.
Trade can also be understood as the movement of goods from the producer to the consumer. It is part of the commerce.
Commerce: Is the activity of buying and selling of goods and services, especially on a large scale or quantity. It goes along with the activities such as insurance, transportation, warehousing, advertising that completes that exchange
Trade is simply the exchange of commodities, and this can take place at many levels. The earliest form of trade was probably “barter trade” in which one type of commodity was exchanged for another of equal value.
Forms of trade
a. Internal trade: This is the exchange of commodities within a country. It is also known as domestic trade. Traders normally need to exchange what they have with what they don’t have. It includes:
- Whole sale
This occurs when traders buy goods in bulky from both the manufacturers and importers. They then break them into smaller units and sell them to kiosk owners, hawkers, shopkeepers and supermarket;
- Retail trade
This is where traders buy goods from the wholesalers and sell them in detail to the individual customers.
b. International trade: This type of trade occurs between different nations of the world, on a global scale. Its rationale lies in the fact that no country can produce everything that it needs. It therefore has to acquire what it cannot produce from others through trade. It involves:
- Bilateral trade: it is a trade between two countries.
- Multilateral trade: it is a trade between many countries, through the exchanging imports where goods and services bought and brought into the country, and exports where goods and services are transferred to another country for sale.
13.1.2. Factors influencing international trade
The type and volume of trade that takes place at any level in any place is influenced by a number of factors. The most important factors are:
- Capital: This is the greatest single factor influencing trade. Money is the engine that runs trade. Traders require capital to establish their businesses, purchase their wares and transport the commodities. Where capital is inadequate the volume of trade will also be low.
- Demand and supply: For trade to take place there must be sufficient demand and good chain of supply of the items.
- Transport and communication: Trade depends highly on efficient means of transport and communication. For example, manufactured goods and other trade items need to be transported to the market. Traders also need to move from one place to another to effect various trade related transactions. Traders have to further communicate while placing orders and while establishing the market situation.
- Trade barriers: This includes the quota system for international trade, where a country may impose limits on imports and exports. They also include tariffs and duties levied on goods, which if increased may discourage the importation and exportation of some goods.
- Government policy: This is where the government influences trade in certain commodities through taxation. For example, the government levies heavy taxes on certain goods such as cigarettes and alcohol.
- Creation of trading blocs: The creation of regional common trading markets enhances trade due to increased cooperation between the member countries. Trade is further promoted because the market is usually expanded.
- Political climate of a country: Political problems such as wars affect both internal and external trade because wars discourage foreign investors and at times destroy industries; whereas good diplomatic relationship between countries encourages foreign investments.
- Population factors: population size, structure, distribution and the diversity between peoples affect the types of goods traded and the volume of international trade.
- Differences in natural resources: Natural resources are not evenly distributed in the world. This is mainly due to differences in climate, sols, relief and geological factors.
13.2. Causes of low levels of international trade in Developing Countries and importance of international trade in the development
13.2.1. Causes of low levels of international trade in Developing Countries
- Access to foreign markets: The foreign markets are dominated by the goods and services from developed countries because they have better quality and produce more quantity of goods.
- Inadequate and insufficient domestic supply on the international market: this causes the increase in prices and this affects the final consumers.
- Most of the developing countries export unprocessed products due to shortage of industries or low level of technology. These unprocessed products also called raw materials are undervalued on international markets.
- Most of the developing countries and other low-income countries export bulk products such as horticulture products, fruits, vegetables and animal products. These perishable products account the risks to be damaged in transport process.
- Developing countries have also been concerned with the growing importance of free trade areas and customs unions in recent years, which now cover virtually all their major export markets, including Europe and North America since most of the major regional trading arrangements do not include them,
- Implications of anti-competitive practices by private enterprises in restricting the market access of developing countries to industrialized countries.
- Quota policy on the international market is negotiated only among the developed countries and developing countries must follow their resolutions.
- Capital inflows: the growing constraints on foreign aid and the difficulties in attracting increased foreign private financing and investment are affecting the growth prospects of countries lagging behind in global integration.
- Financial liberalization in developing countries has mainly comprised the reduction or removal of allocative controls over interest rates and lending, the introduction of market-based techniques of monetary control and the easing of entry restrictions on private capital
Imprtance of international trade in development
- Economic development
- Source of forign exchange
- Market expansion
- Increase in national income
- To improve quality of local products due to completion
- Helps the people of different countries to meet, discuss, and exchange ideas.
13.3.1. Major financial centers of the world
The top ten world financial centre were London, New York City, Hong Kong, Singapore, Tokyo, Shanghai, Toronto, Sydney, Zürich, Beijing, Mumbai, São Paulo, Mexico City and Johannesburg,
Examples of the financial institutions that make a city a powerful financial center
- The International Monetary Fund
IMF:is an international organization that oversees the global financial system by following the microeconomic policies of its member countries. The policies focus on issues related to exchange rates and balance of payment. It is an organization formed to stabilize international exchange rates and facilitate development. It also offers highly controlled loans mainly to poorer countries.
The IMF comes into being in 1945.
At that time, it had only 45 members.
Nowadays, it has 190 members.
Its headquarters are in Washington DC, USA.
The aims of IMF
- To promote International Economic Cooperation.
- To promote international trade.
- To help stabilize exchange rates among member countries.
- To advice member countries to avoid financial arises.
- Promote loans to its members.
- The World Bank
It is also known as “International Bank for Reconstruction and Development (IBRD). It comes into being in 1944. Its headquarters are also in Washington DC, USA.
It was set up with the aim of reconstruction. The war-affected economics of Europe (during the 2nd World War) and assisting in the development of the less developed countries of the world.
Today, the World Bank is more concerned with the development of member countries especially the developing ones.
- It gives loans for the purchase of capital goods necessary for the development.
- It gives also loans foe projects that are clearly profitable.
- World Bank comprises only two institutions:
- The World Bank’s current focus is on achievement of the Millennium Development Goals (MDGs)
- Governments at the United Nations Millennium Summit in 2000 agreed the following goals and set quantifiable targets to be achieved by 2015:
- Eradicate extreme poverty and hunger.
- Achieve Universal primary education.
- Promote gender equality and empower women.
- Reduce child mortality.
- Improve maternal health.
- Combat HIV / AIDS, Malaria and other diseases.
- Ensure environmental sustainability.
- Develop global partnership for development.
13.3.2. Trading blocs and regional economic integration
A trade bloc is a type of inter-governmental agreement, often part of a regional inter-governmental organization, where regional barriers to trade, (tariffs and non-tariffs barriers) are reduced or eliminated among the member states.
a) Advantages of trading blocs and regional integration
- It leads to economic growth and expansion.
- It widens the market for goods and services.
- It raises an increase in investment.
- It creates specialization among countries and this enables the countries to produce more goods and services.
- It promotes trade since there are no complications congesting currencies.
- It encourages exports and imports of goods and services thus enabling countries to get what they cannot produce.
- It creates competition between local and foreign products leading to improvement in the quality of the goods.
- It creates employment opportunities with increased income.
- It stimulates an expansion and establishment of manufacturing industries.
- sIt allows member countries to conduct research and to collect information at a cheaper price.
b) Disadvantages of trading blocs and regional integration
- Limited fiscal capabilities
- Loss of sovereignity
- InterdependenceLimited fiscal capabilities
- Cultural centralization
- Concessions
c) Factors affecting regional intergration
- Homogeneity of goods produced among the member states can hinder trade.
- Some countries have experienced a shortage of forign exchange.
- Different ideologies
- Limited capital for some member countries
- Countries of the bloc have different levels of development
- low level of industrialization
d) Problems affecting international trade
- Protectionisms: There are ways of implementing a protectionist policy, and every country in the world protects some of its goods.
- Tariffs: The effect of high tariffs is to make imported goods equally or more expensive than home-produced articles.
- Quotas: If tariffs are ineffective in halting the inflow of cheap foreign goods, countries may resort to imposition of quotas. By a quota system a country refuses to import more than a specified quantity of a certain commodity.
- Subsidies: The government of a country may pay subsidies or give tax relief, in order to stabilize home prices. This involves assistance to home industry rather than penalization of foreign producers.
- Trading blocs: In recent times trade has been modified by the formation of economic unions such as EEC (European Economic Community). Though tariffs are broken down between the member nations and there is greater flow of the trade amongst them
e) Possible solutions to problems of international trade
- Joining and enforcing trading blocs like EAC, EEC.
- Common market or grouping which not only reduces tariffs and other restrictions within the group but at the same time raises tariff barriers against outsiders.
- Construction and rehabilitation of infrastructure.
- Political negotiations and discussions to reduce and ultimately end political instability and insecurity so that a favorable trading atmosphere is created.
- Improving the quality of manufactured goods so that they are attractive and competitive on the international market.
- Foreign investment to diversify domestic economy within countries. This may overcome the problem of similarity of goods on the market.
13.4. Case studies
13.4.1. Regional integration
a) The East African Community
The country members are: Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda. The headquarters of EAC is at Arusha in Tanzania.
The organization was founded in 1967, collapsed in 1977, and was revived on 7 July 2000.
Aims of EAC
- To revive free movement of people, goods, money, and services.
- Create common (tax) tariff.
- To create large market for goods and services.
- To promote regional cooperation.
- Improving communication.
- Sharing electricity
- To promote electricity.
b) Economic Community of West African States
The Economic Community of West African States (ECOWAS). Established on May 28 1975. Member countries of ECOWAS include Benin, Burkina Faso, Cape Verde, Cote d’ Ivoire, The Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Sierra Leone, Senegal and Togo
Objectives of ECOWAS
- To promote economic cooperation
- To uplift living standards of member states
- To achieve and maintain economic stability of member countries
- To enhance free movement in member states without immigration formalities.
This regional organization has achieved the following:
- ECOWAS has frozen all customs and tariffs on goods originating within West African and this has led to industrial growth, pooling of resources through joint ventures by certain member states.
- It has decreased prices among the member states of some products like petroleum.
- It has increased technological exchange among the member states.
- There has been an improvement of communication in the region.
- The Common Market for Eastern and Southern Africa (COMESA)
It was established in 1994 in December replacing a Preferential Trade Area (PTA) which had existed since 1981. It has the secretariat in LUSAKA, ZAMBIA.
The aims of COMESA.
- To promote trade.
- To promote research in science and technology for member states.
- To ease the movements of goods and services.
- To lessen dependence on imported goods that are very expensive.
- To finance development projects and organize regular trade forum for the member states.
- To promote transport and communication.
- To promote peace security and stability.
The member states in 2011 were:
Angola, Burundi, Comoros, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Somalia, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe.
Importance of COMESA in regional economy
- Promotion of regional trade
- Increased revenue
- Growth of industries
- Improvement in telecommunication
- Establishment of financial institutions
- Promotion of investment
13.4.2. Trading Blocs.
i) Organization of Petroleum Exporting Countries
The Organization of Petroleum Exporting Countries (OPEC) is an organization of oil-producing countries. It controls 61 percent of the world’s oil exports and holds 80 percent of the world›s proven oil reserves. OPEC’s decisions have a huge impact on prices. The country members are: Algeria, Angola, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.
OPEC’s three goals
- To keep prices stable. It wants to make sure its members get what a good price for their oil. Since oil is a fairly uniform commodity, most consumers base their buying decisions on nothing other than price.
- To adjust the world’s oil supply in response to shortages. For example, it replaced the oil lost during the Gulf Crisis in 1990. Several million barrels of oil per day were cut off when Saddam Hussein›s armies destroyed refineries in Kuwait. OPEC also increased production in 2011 during the crisis in Libya.
- To coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets.
ii) European Union (EU)
The European Union (EU) is a union of twenty-five independent states based in Europe.
It is the largest single common market in the world.
It has the common currency, the Euro, which is acceptable in all member states.
Member of EU are: Austria, Netherlands, Hungary, Belgium, Portugal, Latvia Denmark, Spain, Lithuania, Finland, Sweden, France, Poland, Slovakia, Germany, Slovenia, the UK, Greece, Ireland, Malta, Italy, the Czech Republic, Estonia, Luxembourg, and Cyprus.