When individuals or firms purchase a commodity that has been produced more cheaply in another country, the standards of living in both countries is improved. Another reason that makes consumers buy products from abroad is that the product may fit their needs more than similar products in the local market or the product may not be available altogether. In any case, both the producer in the foreign country and the domestic consumer are better off with international trade. The producer benefits from making sales on a larger scale than he could have done only locally, and the consumer enjoys better commodities in terms of quality and fit of their needs.
However, not all parties benefit from international trade. When an consumer purchases products from abroad because it may be cheaper than the local one, he will benefit but at the cost of the domestic producer who will have lost sales to the foreign firm. The bright side is that the buyer will benefit more than the domestic producer will lose. When we exclude cases of including social costs like pollution in the costs of production, the world is better off with international trade.
All economists can agree that international trade makes the world a better place. Despite this agreement, international trade has been a contentious issue both within a country and between governments. Many people who have had the perception that international trade bring unfair competition have strongly opposed it and for centuries the debate still exists even after economists like Adam Smith and David Ricardo formed economic basis for free trade which later led to more studies in support of it. It is in line with this argument that this paper researches on the benefits of international trade to the living standards in three developing countries and how it has improved industries and the GDP as a whole.
Brazil, a country that is mostly covered by the amazon, is the fifth largest economy in the world and the largest in the Latin America. It has a population of over 200 million people, who live mostly along the coastline of the Atlantic Ocean. The economy is bigger than that of all the countries in South America because it has established large and well-developed sectors that include agriculture, mining, manufacturing, and service provision sectors. Furthermore, its working middle class is expanding at a fast rate (Ellis, 2012).
The presence of Brazil in the international market has been expanding rapidly. Due to the steady improvement in the stability of its economy, Brazil has experienced macroeconomic growth characterised by increase in foreign reserves and reduction in foreign debt by relying more on the domestic borrowing. In fact, in 2008, Brazil’s debt was awarded the investor grade and Brazil is now considered a net external creditor.
Between 2003 and 2014, Brazil experienced social and economic growth that resulted in reduction in inequality and more than 29 million people were elevated from poverty (World Bank, 2017). During this period, income for the entire population grew steadily by a rate of 4.4%. In real terms, income attributed to 40% of the poorest people in the economy grew by an average 7.1%. Despite these steps, since 2015, the economy has stagnated in reducing poverty and inequality levels remain high. The nation achieved universal coverage in elementary education but is now facing challenges in improving the quality and productivity of the education system. These challenges mainly affect both the lower and tertiary levels of education.
Brazil is undergoing a deep recession now. Its economic growth rate has been reducing consistently since 2010. In 2006, the country had a strong growth of an average annual growth rate of 4.5% up until 2010. However, in 2008, the global financial crisis hit the economy hard. Global demand for Brazilian exports fell and eternal sources of funds dried up. In 2010, Brazil recovered from the crisis and was among the first emerging economies to begin recovery. Investors and consumers revived their confidence leading to the GDP to grow to a rate of 7.5%. This has been the highest rate the country has been able to achieve in the past 25 years. However, this rate fell to 2.1% by 2014. In addition, the GDP has been reducing in the past two years. In 2015, the GDP fell by 3.8% and was followed by another decline of 3.6% in 2016. Several factors have led to this decline. These factors include high inflation rates, low productivity that is characterised by high costs of operation, depending heavily on raw commodities exports, and high, persistent inflation rates, and low investment levels ("Brazil Economy - overview - Economy", 2017).
With its population of over 200 million, the last records of the GDP per Capita in brazil were at $7627.67 in 2015. This GDP per capita equals to 88% of the global average. Brazil achieved an all-time high of $11797.45 in 2013 (World Bank, 2017).
Unemployment is continually increasing in Brazil. The unemployment rate was at a high of 11.9% in 2016. This translated to an increase of 33.1% from 2015. Unemployment is worst in the capital Rio de Janeiro forcing the public employees to rely on government handouts. Currently, the unemployment rates in Rio are at 11.7%, while that of the entire nation is 11.4%. Most of the sectors that have been largely affected by the unemployment are agribusiness, manufacturing, construction, and professional services including finance and real estate (Rapoza, 2017).
In 2015, the government implemented tight monetary policies and elevated the interest rates in a bid to ease inflation. It realigned prices and passed through the depreciation of the exchange rate causing the inflation rate to peak at 10.7% in December. This was way above the upper limit of the government’s target of 4.5 ± 2%. Presently, the inflation rates have decelerated. The rates fell to a low of less than 6% in 3 years. This made the bets on the market stronger hence a high reduction of interest rates by 75 basis points by the central bank. It is expected that by June 2017, the inflation rates should have gone to the government’s target of 4.5%. This will enable policy makers to reduce the target for the first time in more than 10 years ("Brazil Economy - GDP, Inflation, CPI and Interest Rate", 2017).
Monetary policy is the main tool used to ease inflation in the goods and service provision sector. After President Dilma Rouseff was impeached in August 2016, the vice president Michel Termer took office and directed the policy makers to look for monetary and fiscal adjustments that would restore investor confidence and ensure that the environment was conducive for investment. This move has however faced challenges and opposition. The difficult political environment and a rigid budget has undermined the modifications on the fiscal policy. There is no way to reduce public expenditure because of the rigidity of the bind by the constitution and other legislation. This imposes a burden of payment on the subnational government exposing them to a risk of insolvency.
International trade is of great significance to the economy of Brazil although trade and investment face challenges in bureaucracy and regulation. The sum total of the value of imports and exports accounts for 27% of the GDP. The government applies an average tariff of 7.8%. The government plays an important role in the diverse and competitive financial sector and 50% of funds in the private sector are financed by public banks ("Brazil Economy - GDP, Inflation, CPI and Interest Rate", 2017).
The economic crisis that Brazil is facing has led to major changes in the BOP current account. In response to the reduction of the GDP in 2016, the current account deficit fell to 1.6% of the GDP. This was a significant fall when compared to the 4.3% deficit that was recorded in 2014. By the end of 2015, 135% of the current account deficit was funded by direct foreign investments thus accounting for 4.2% of the GDP.
Putting in place growth enhancing changes the success of the adjustments that have been put in place will determine the outlook of the medium to long-term economic advancements. The drivers of growth have been stunted in the past. These drivers such as expansion of labour and commodity boom, and consumption that is fuelled by credit availability are important for the advancement of the economy. It is important that the government increase investment and gains from productivity in the effort to raise competitiveness and achieve growth in future.
The government is seeking to reinforce the economy and the workforce in particular in the long run. To do this, it has imposed local content and made it necessary for foreign businesses to transfer technology. In addition to this, further research is being done in energy, healthcare and technology, with further investment in education through programs such as Bolsa Familia and the Brazil Science Mobility Program (World Bank, 2017).
The technology sector of Brazil has gone through a significant change in the last decade. The Ministry of Science and Technology supervises the technological aspects of the country. It has direct supervision control on the National Institute of Space Research, National Institute of Amazonian Research and National Institute of Technology. Over the past few years, these institutes have shown major progress. The healthcare sector of Brazil is another growth sector. This sector consists of government funded organizations, non-profit organizations and private medical organizations. The Ministry of Health supervises the healthcare industry of Brazil. The government funded organizations offer quite good medical services and they are still working on the improvement of the sector. Almost 70% of the citizens prefer the government hospitals. The medical insurance is mostly used in the private medical organizations. Med Center and Academia Nacional de Medicina are two non-profit medical organizations. Brazil also has a Unified Health System, known as SUS, and citizens have a SUS card to avail the benefits.
Brazil has undergone a turbulent economic time in the past. The global financial crisis, economic recession, the political crisis in the country, and a fall in the prices of commodities has made the economy to contract sharply. These events reduces the confidence of the investors and consumers in the economy. High inflation rates, a wide deficit in the budget and balance of payments accounts, and political paralysis have compromised the fiscal and monetary policies in the country leading to a heavy burden of public debt. There is an excessive interference by the state on the economy coupled with poor and inefficient service from the government. Despite these challenges on the economy, the future looks bright if the reforms are successful.
The Republic of Kenya is country is in Africa. It is a founding country of the East African Community. The geographical boundaries of the country lie on the equator and it is situated on the east side of the continent. The boundaries cover roughly 600,000 km2 with its largest city and capital being Nairobi. In January 2017. The country had a population of 48 million people ( United States. Embassy (Kenya); United States. International Trade Administration., 2014).
Kenya is a developing country that highly depends on loans and aid from international donors. Its main export is agricultural produce and it mainly imports capital goods from developed nations. The country generally runs a balance of payments deficit, which varies widely depending on how successful the market of agricultural products have been that year. The success of the market for agricultural products on the other hand highly depends on the weather conditions during the year and the international prices of the commodities. In 2010 for example, the country’s deficit was at $73.5 million. This figure rose significantly to $213.2 million in 2014 because of the drought that hit that year. However, the country has a large amount of foreign exchange reserves that totalled to $875 million in 2014. Through this reserve, Kenya has been successful in reducing its public debt in a big way over the years.
Throughout east and central Africa, Kenya is the largest and the most superior economy. It also has an affluent urban economy and is ranked the ninety second in the World Bank for the ease of business out of 190 countries. Although the agricultural sector is the most important sector, it remains the least developed and mostly inefficient. The sector employs about a third of the workforce, which is a big percentage, compared to the developed countries who are food secure employing less than 3%. Kenya is classified as an emerging economy.
The major imports into Kenya include capital products like petroleum products, equipment, machinery and transportation, and intermediate products such as steel and iron. A total of $2,900 million constitutes the value of the goods imported into Kenya. Of this, capital goods approximate $700 million forms the value of capital goods and $1700 million forms the value of intermediate products. Imports from the Western Europe and especially from the United Kingdom and Germany increased to $1048 million by the end of 2014. Imports from other African countries also rose significantly from $59 million to $136 million from 2012 to 2014. Japan and the USA are also important exporters of the Kenyan products. Kenya imports products and services from these countries totalling to about $500 million.
The tourism sector dominates the Kenyan service sector that contributes 61% of the country’s GDP. The industry has exhibited consistent growth over the years and now it is the main source of FOREX of the country. Kenya receives tourists from countries all over the world. The majority of tourists come from Germany and United Kingdom and are attracted to the national parks, the coastal beaches and game reserves.
Tourism is the largest source of Kenya’s foreign exchange followed by the agricultural sector. It has been undergone substantial growth over the past several years and it has contributed to the economic growth of the country. The tourism industry generates about $700 million each year. In addition to the economic growth, numerous shopping malls have been built and many hypermarket and it has as well improved the transport sector and water supply. Apart from this, tourism in the country is connected to drugs, alcohol and prostitution, which have been a cost to the society. Agriculture accounts for 24% of the GDP of Kenya and the revenue from exports contributes 50% of the GDP. The primary cash crops of the country are tea, coffee and horticultural produce. The two most important growth sectors and most valuable export items of Kenya are Horticultural produce and tea. Corn is one of the main food staples. The production corn is dependent on sharp fluctuations in weather. The periodical fall in the agricultural production leads to intermittent drought in the country and necessitates the supply of food aid. For instance, in 2004 the food aid came for 1.8 million people due to one of the intermittent droughts of Kenya.
Agriculture is the second largest contributor of the GDP in Kenya after tourism. The sector contributes 24% of the GDP and the revenue from exports accounts for 50% of the GDP. The main cash crops are tea, coffee, and horticultural products. Horticulture and tea form the major sectors of growth of country and are the two most valuable exports.
Through trading with other countries, Kenya has been able to get a wider market for its agricultural produce. This has encouraged production because the farmers have ready market for their produce abroad and they get good prices.
The government of Kenya promoted the policies for trade liberalization during the 1990s and that reduced the maximum rate of tariff to 25% in June 1997 from 45% to June 1994. The trade liberalization process is generally supported by Western governments and international financial institutions. However, it has negative impacts on a country like Kenya, since it is dependent mainly on agricultural exports and highly capital intensive imports. Since the manufacturing sector of Kenya is not able to compete with the foreign counterparts, the decline in the measures of trade protection, like, tariffs, would result in impediment of the industrial sector of the country. This would lead to further block to the progress of the agricultural sector and would prolong the imbalanced trade patterns, which contributes majorly to the deficit in balance of trade for Kenya. In such cases, the basic concept of comparative cost advantage of the countries does not hold relevance.
The benefits of trade are attributed to the Regional Trading Arrangements (RTA), such as EAC. In such agreements, the member countries are usually at same level of playing field, that is, at same level of development conditions. However, the benefits might differ disproportionately for different countries, which is a case for Kenya and EAC, while Kenya is part of the 21-country RTA and the Common Market for Eastern and Southern Africa (COMESA).
Indeed international trade is important to any country, whether it is developed or not. Even those countries that have comparative advantage will need international trade for the market of their finished products and for cheaper raw materials and labour. Apart from these, we have seen that international trade has many more benefits that will include better standards of living, better relationships between countries and efficiency in production.
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