Formation of trade agreements
International trade refers to the trade, which takes place beyond the boundaries of one particular country (Krugman, & Obstfeld, 2004). As the world integrates, countries with common interests tend to integrate their markets by signing common market agreements. Some of the drivers of international trade include single currency, improved transport system as well as enhanced communication technologies. The three are the main drivers of trade. When Europe began using a single currency, the entire continent became a common market, with goods produced in England finding their way into the Russian market and vice versa.
The formation of trade agreements enables cooperation among countries, which in turn leads to the lifting of bans. This ensures that there is a free movement of goods and services, thereby promoting cross border investments. Cross border barriers hinder the movement of goods and services in many countries. The United States of America is currently the largest economy in the world because it has more than fifty states existing as a single substantial market with no cross border movement restrictions on either goods or services.
Another driver to international trade is the development of effective transportation networks that open up regions to foreign investors. (Bines & Thel, 2004). Effective communication and transportation networks reduce the cost of doing business in a region. This factor attracts more foreign investors and international companies to set up their businesses in a region.
However, international trade is susceptible to a number of factors. A company like Coca Cola, for instance, shut down its operations in Zimbabwe and other African markets in 1980 because of threats. The greatest of these threats were stringent policies in some of the markets and negative perceptions from the natives. The taxation system, coupled with the increasing recession in Zimbabwe, culminated in enormous losses for the company that was merely launching its operations in the South Africa market. The absence of such threats in a market encourages fast investing, thereby becoming the main driver of international trade.
The African market stayed unexploited for an unusually long time. When it became evident that the African market is promising, many companies from Europe and Asia moved in, hoping to benefit from the weak economies. However, once in the region, the high tax rates, expensive costs of electricity, and the constant political turmoil in the once-lucrative market became deterrents to investments.
Nina, your post on the same topic offers an extensive insight into the importance of international trade. Your claim to widen the customer base is a driver to international trade. However, one ignores the disadvantages of this trade. International trade discourages the development of local industries, thereby discouraging innovation while encouraging dependencies on foreign products. International trade does remarkably little in the development process of underdeveloped countries.
Kelly Brown, your post as well in detail, discusses the drivers of international trade. I particularly agree with you that globalization has had a significant contribution to the development of international trade. Your discussion on the hindrances of international trade clearly shows that you understand that international trade may not always be existent in all regions of the world at all times. However, just like with Nina’s post, you ignore the negative effects that this trade has on the regions they set up in.
Bines, H., & Thel, S. (2004). Investment Management Law and Regulation. London: Aspen.
Krugman, P., & Obstfeld, M (2004). International Economics: Theory and Policy. New York: Pearson.