Which Best Explains Why International Trade Agreements Are Beneficial For Developing Economics

Small, vulnerable economies are likely to be hit hard by their dependence on trade as an engine of economic growth, their small domestic markets and their low diversification (see Figure 7 above), increasing their vulnerability to external shocks – as the global financial crisis has shown. Multilateral trade liberalization, in which all countries reduce their trade barriers in parallel, is the best way to promote trade on the basis of comparative advantages. However, countries can abuse the system by adopting a “beggar” policy A policy that makes an economy open to trade and investment with the rest of the world is necessary for sustainable economic growth. The evidence for this is clear. No country has experienced economic success in recent decades in the form of a significant increase in the standard of living of its population without being open to the rest of the world. In contrast, openness to trade (as well as openness to foreign direct investment) has been an important element in the economic success of East Asia, where the average import duty has risen from 30% to 10% over the past 20 years. The main driver of export growth during this period has been the massive increase in the prices of fuels, alder and metals, which reflects the strong demand in developing countries, especially China. Based on 2005, growth is more remarkable, by 0.3 percentage points, from 0.5% to 0.8% in 2019 (UNCTAD, 2016). The Heckscher-Ohlin model, which is good at projecting likely business models between countries where the factors of production are different, really did not explain this business structure. Krugman`s theory is based on product differentiation and economies of scale.

For example, a Jeep and a Volkswagen are both automobiles, but they are very differentiated, as the consumer sees. And both benefit from economies of scale; This means that the larger the production, the more costs can be reduced in a wide range of volumes. Unlike wheat, where the cost increases with increasing quantity, the cost of each additional automobile produced decreases as production increases, although with a very large volume of production costs would likely increase. Goods such as automobiles require large mechanized production series and significant capital investments, and it can be extremely difficult for a new entrant to compete with an established company. In 1979, economist Paul Krugman noted that much of the trade took place between developed countries that offered similar factors of production. For example, the United States and the nations of Europe have broadly similar factors of production, but usually engage in huge trade within the same industries. Thus, the United States will export automobiles and auto parts to Europe while importing cars and auto parts from Europe. A type of model widely used by economists to estimate the macroeconomic impact of trade policy changes, such as. B the results of a multilateral trade cycle, is the applied general equilibrium model, also known as the computable general equilibrium model (CGE). [13] James Non-tariff barriers – such as import quotas, subsidies, standards and regulations – need to be converted into customs equivalents, which is often difficult and unreliable.

For new areas addressed in trade negotiations – such as services, investment and intellectual property – efforts to measure the impact of barriers are even more challenging. One of the most important contributions to international trade in services is tourism. In addition to the direct service itself, tourism has great multiplier effects that extend to the national economy. .