International trade is defined from various sources as the exchange of goods and services between countries. International trade allows countries to expand their markets for both goods and services that may not otherwise be found domestically. In international trade, the goods and services are called imports and exports and it mainly involves foreign exchange. International trade is either visible (exchange of goods) or invisible (for exchange of services like tourism and electricity).
Imports: these are commodities bought by a country or its citizens from other countries.
Foreign Exchange Rate: A foreign exchange is the value of a country’s currency in terms of another country’s currency. Foreign exchange rates are in two types with regard to the way they are determined. Fixed or pegged exchange rate determined by the government and floating exchange rate which is determined by the forces of demand and supply of the foreign currency. When the foreign currency is readily available in the market, then its exchange rate is low because its demand is low whereas when the currency is in limited supply, then its exchange rate is high because its demand is high.
International trade (either bilateral or multilateral) has both merits and demerits to the economies that are involved in it. International trade can lead to either a surplus or a trade deficit and these have an effect on an economy’s GDP. According to McTeer B (2008), GDP is the sum of all income generated from goods and services from exports less expenditure on imports. Therefore international trade may expand or contract depending on whether surplus or deficit respectively is the result.
A trade deficit is the result when imports of a country exceed exports and this can lead to a decline in the growth of the GDP whereas a trade surplus leads to the GDP growth of the economy. Changes in the value of a dollar relative to other currencies that make the dollar cheaper makes our products cheap and so they can be bought more and the trade deficit if any is reduced. According to McTeer, the American exports also respond positively to higher demand of the foreign currency (cheaper dollar). In the same vein, imports also grow with higher demand at home and a more expensive dollar. In order to reduce the trade deficit to grow the GDP, the dollar should depreciate and this is the reason countries devalue their currencies to make their products cheap for the foreign markets. An export surplus is good for an economy because it allows businesses to have more products which are offered to consumers and this in turn lowers the product price for the consumer. When consumers buy more, there is an increase in purchases which brings in more revenue for businesses. This grows the economy by way of sales tax with increased movement of money (www.allfreepapers.com/business/international-trade).
In the case when we are experiencing a trade deficit, the government can intervene to reverse the trend of events. This can be done by what economists call protectionism. Some of the ways of doing this is introducing tariffs and quotas.
A tariff is a tax or duty which is levied by the domestic government as a percentage of the value of the imported good to make it more expensive so that its demand lowers and in turn its supply will go down proportionally. This is done to protect the home infant industries that are producing the same goods. This also discourages dumping of products from the foreign producers. The World Bank however estimates that if trade barriers are removed, the world economy could expand by $830 billion by 2015 which means protectionism has disadvantages (economics.about.com/cs/tax policy/a/tariffs.html).
Whereas quotas are physical or qualitative restrictions the government can place on the amount of commodity imported at a given time. Import quotas restrict the amount of imports to the country. Like tariffs, quotas limit the amount of goods imported and drives up their price and in turn demand lower as well as supply. Tariffs and quotas can have an effect relation between governments especially if there are standing trading blocks and if they are done as retaliation, they affect the political and economic relations. However if the trade barriers are implemented properly they can enhance national security, encourage the exploitation and utilization of domestic idle resources, facilitate development of domestic industries which in turn fosters the increase in employment opportunities.
When there is import surplus this means a trade deficit. An example of trade deficit for the United States is trade relation with China. According to the office of the United States trade representative, the US exports totaled $154 billion and imports were worth $422 billion giving a trade deficit of $ 269 billion in 2011(http://www.ustr.gov/countries-regions/china). This deficit lowers the country’s GDP because the imported goods are priced lower than domestic goods which lead to unemployment because the domestic industries are forced to restructure and as a result job opportunities for university graduates are less.
Despite the existence of trade deficits between china and the United States, the government can’t simply restrict goods and services from china or another country for that matter. This is because there are differences in natural resources endowment like minerals and forests. For that reason the US cannot be self sufficient in terms of goods and services, making it hard for the economy to satisfy all the needs of the country.
We should also note that as an economy, the United States should export the goods and services produced to get foreign exchange if not for marketing the products of our industries, but for selling the surplus products produced by our industries in order to avoid wastage of resources. We can’t however be able to export if we do not allow imports in our economy for the reasons of specialization and competitive advantage, differences in tastes and differences of our citizens and the fact that our nation should forge international relations besides our nation being a super power.
With regard to trading with china specifically, it is soon becoming the second largest world economy after the United States; this only makes china a very important partner for the United States. Specifically china was the 3rd largest export market for the United States products in 2011 given its large population. The US exports machinery, agricultural products like soyabean, Cotton, vehicles, and aircrafts whereas china is our largest supplier of imports as statistics from 2011 indicate. The United States imports quality and affordable goods from china which may not found from other industrial economies from china for example toys, sports equipment, furniture and bedding and footwear.
Office of the United States Trade Representative: Executive Office of the President. Retrieved From (http://www.ustr.gov/countries-regions/china