International Trade: Advantages and Disadvantages

This document discusses the concept of international trade and its advantages and disadvantages. It explores the theories of mercantilism, absolute and comparative advantages, and factor endowment. It also examines the impact of trade barriers and tariffs on the trading process.

Running head: INTERNATIONAL TRADE
International trade
Name of the student
Name of the university
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1INTERNATIONAL TRADE
Part A
Question: 1
International trade refers to process of exchanging goods and services among different
countries and regions. In the case of international trade, exchange of goods and services is being
done beyond the national boundaries and different countries get involved in the process. With the
help of the international trade, each involved countries can optimally utilize their available
resources and earn foreign reserves in the process. However, it should be noted that international
trade do not involve investment of the foreign players in the domestic market or vice versa but it
involves only the trading process between the countries including import and export (Vernon,
2017). Mercantilism theory of international trade refers to the restrictions being imposed on the
import of certain goods from the foreign countries in order to safeguard and immune the
domestic industries by fending off the foreign competition. There are few benefits that can be
gained by embracing the mercantilism theory of international trade. One of the major benefits is
the growth of the domestic industries. This is due to the reason that in the majority of cases
mainly with the underdeveloped and developing countries, domestic industries are not
competitive and advanced enough to compete with the foreign players especially from the
developed nations. Thus, entry of these players in the domestic market will pose challenge to the
domestic players and will also affect their survival (Jones & Kierzkowski, 2018). This will in
turn kill the domestic industries and the particular country will get entirely depended on the
foreign imports. Hence, with the help of mercantilism, domestic industries will grow and the
country will become more self sufficient (Laursen, 2015). Another major advantage that can be
gained from the initiation of mercantilism theory is the gaining of competitiveness in terms of
exporting. This is due to the reason that the domestic industry will pose strong results with the

2INTERNATIONAL TRADE
immunity they will gain due to mercantilism and this will ensure that they are operating in
surplus. Thus, export trend will get increased and will return high foreign reserves. Initiation of
mercantilism can also help the country in gaining more bargaining power in the international
trade. This is due to the reason that the stronger will be the domestic industry, the more will
bargaining power will be gained by them in dealing with the international trade partners as the
comparative advantages will be with the domestic industry (Levchenko & Zhang, 2016).
However, on the other hand, it should also be noted that apart from the advantages that
can be gaining by initiating mercantilism, a few disadvantages will also get emerged with one
being getting deprived of latest technologies and practices. This is due to the reason that if the
foreign players are restricted from entering the country, the domestic industry will not have the
access to the improved processes and thus technological development will get slowed down
(Bahar, Hausmann & Hidalgo, 2014). In addition, the competitive rivalry will also not get
increased for the domestic players and this will not create any force for the domestic players in
enhancing their business processes. Thus, it can be concluded that initiation of mercantilism will
reduce the effectiveness of the domestic players in the long term.
Question: 2
1. Absolute and comparative advantages are the two forms of gaining competitiveness in the
international trading process. Absolute advantages are being gained by the countries when they
are having the access to strategic resources, which enable them to produce goods or services in
the most effective forms over other countries. Countries with having the absolute advantages will
be able to produce the certain items in lowest possible cost and thus having competitive edge
over other countries (Ju, Lin & Wang, 2015). For instance, China is having absolute advantage in

3INTERNATIONAL TRADE
producing goods with lowest possible cost of human resources over the other countries. This
advantage cannot be gained by other countries. On the other hand, comparative advantage refers
to the phenomenon when a particular country is in the position to produce a certain product in
lower opportunity cost over than other countries. For instance, Saudi Arabia is having the
advantage of producing oil based products in less cost as compared to other countries due to their
abundant availability of crude oil.
2. In the case scenario, it is stated that New Zealand is leveraging on the TPP in order to enhance
their economy by having more business opportunities with the Asian countries, In this case,
comparative advantage of New Zealand over some other countries in producing certain materials
will help in gaining the maximum benefits from the Trans pacific partnership. It should be noted
that with the help of the Trans pacific partnership, New Zealand will be able to face lower tariffs
and custom rates in doing business in the given 11 countries (Lin, Sun & Jiang, 2013). Thus,
only the production cost will be mattered in this case. New Zealand is having comparative
advantages in producing certain items such as Kiwi fruits, milk and meat. These products can be
exported to the selected 11 countries under the Trans pacific partnership in lowest cost possible.
This will ensure that the comparative advantage of New Zealand will be optimally utilized
(Schumacher, 2013).
Question: 3
According to the factor endowment theory, countries export only those goods, which
require abundant resources available with them. On the other hand, they import the goods or
services, which the country is not having comparative advantages with. For example, Angola is
exporting only and 98 percent of their total exports are constituted of oil. This is due to the

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reason that oil resources are abundant in Angola and thus they are focusing more on exporting oil
in lower opportunity cost over other countries. It is stated that New Zealand is having free trade
agreement with China since 2008 (Bennett & Nikolaev, 2016). According to the factor
endowment theory, New Zealand is having comparative advantages in producing organic fruits
and other products and milk and meat. On the other hand China is having comparative
advantages in terms of land and labor. Thus, with the help of free trade agreement between the
two countries, New Zealand is focused on their entrepreneurship factor and China is focusing on
their land and labor factor. Firms from New Zealand are exporting the products they are having
advantages while China is leveraging on offering affordable services on the basis of their low
cost and high skilled labors. With the help of the free trade agreement, both China and New
Zealand are gaining profits by leveraging on their respective comparative advantages (Cabral,
Falvey & Milner, 2013).
It is also stated that New Zealand is also having Trans pacific partnerships with 11 other
countries in order to have lower sets trade barriers in the process. On the basis of the factor
endowment theory, this is also helping New Zealand in gaining competitiveness by leveraging on
their factors endowed. This is due to the reason that 11 countries selected from the Asia Pacific
zone are having comparative advantage of labor only. On the other hand, New Zealand is having
the advantage in producing fruits, milk and meat. This is helping them to export these items to
the 11 countries and instead getting the advantages of low cost of labor in the selected 11
countries. It should also be noted that with the help of the Trans pacific partnership, New
Zealand based business firms will be able to have their operations in the 11 countries and gain
the advantage from lower cost of human resources (Apicella et al., 2014). Thus, it can be
concluded that New Zealand will going to gain in terms of global business from both the free

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trade agreement with China and partnerships with other 11 countries. New Zealand is a
developed economy and they are having access to higher cash flow in the economy and
improved technologies but lacking in terms of human resources and New Zealand is a small
country in terms of total population. However, with the help of the Trans pacific partnership
agreement with the 11 Asia Pacific countries and free trade agreement with China, lack of
adequate and skilled man power will be mitigated (Galiani, Schofield & Torens, 2014). This is
due to the reason that China as well as the other 11 countries is having huge population and it
will help the firms from New Zealand to take the advantage of low cost services from these
countries. This will ensure that average cost of operation for the New Zealand based firms will
get lowered and they will also gain more competitiveness.
Question: 4
There are number of trade barriers relevant in the current trend of international business.
The major two trade barriers are price based barriers and foreign investment controls. Price
based barriers refer to the imposition of tariffs and duties in the flow of import and export to
restrict the trading process. For instance, government of a particular country imposes higher
custom duty for the import of certain goods (Bernard, Grazzi & Tomasi, 2015). Thus, the cost of
import will get increased, which will in turn increase the end price and will lose attractiveness in
the host market. This is being done by the government in order to de-motivate the importing of
certain items. For instance, the United States have imposed a tariff of 22 percent on the import of
steel from China in order to safeguard their domestic steel industry. This is being done due to the
reason that import of cheaper steels from China is taking away the market for American steels,
which are having higher price levels. Thus, imposition of tariff on the imported steel will reduce
its trend and the end goods will have higher price points. On the other hand, there are number of

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restricted items also being stated by different governments, which cannot be imported in the
country in any forms. This is being done when diplomatic issues get emerged between the
countries or safety concerns are associated with the imported goods (Brandt & Morrow, 2017).
For instance, import of any goods from North Korea is banned in the United States due to
diplomatic and security reasons. This can also be considered as a major price based barriers to
trade.
Foreign investments controls are also being practiced by the governments in creating
barriers in the international trade. This refers to the process of capping the percentage of foreign
direct investments in different business sectors beyond which the foreign investors will not be
able to acquire stacks. For instance, foreign investors can invest up to 51 percent in the retail
sector of India. Thus, it denotes that any foreign investors cannot have standalone subsidiary in
the Indian market rather they have to invest in an Indian firm. In addition, foreign investors can
invest up to the range of 49 percent in the Indian defense sector (Blonigen & Piger, 2014). This
capping is restricting the free flow of the international trade by capping the amount of
investments that can be done by the foreign investors. It should be noted that foreign investment
controls are being initiated in order to maintain the interest of the domestic players along with
having the majority controls with them. Thus, it helps in getting the investments along with
having the greater controlling power over the investors. This strategy is more relevant in the
developing and under developed countries where the control and interference of government in
the business affairs is more compared to the free and market based economy in the developed
economy (Holmes Jr. et al., 2013).
Question: 5

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Import and export tariffs are being practiced in order to regulate the trading process
between the countries. Import tariffs refer to the duties, which are being applied on importing of
certain goods from the foreign countries. Imposing higher rate of import duties will reduce the
level of import in the country and vice versa (Felbermayr, Jung & Larch, 2015). On the other
hand, export tariffs are being initiated to restrict the export of goods to certain countries as well
as motivating to export more. Thus, these tariffs are being practiced in accordance to the real
world situations and requirements. For instance, if the import tariffs of importing of certain
goods in New Zealand get increased, then the import rate will get reduced and the domestic
players will face lower sets of competition. On the other hand, with the help of export tariffs in
the forms of incentives can help New Zealand in enhancing the export process and earn more
foreign reserves in the long term (Amiti & Khandelwal, 2013). The price of the imported items
in the country will get increased with the increase in the import duty and the exported items can
offered in more competitive pricing if export tariffs are being offered.

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Demand
Supply
D1
S2 S1E1 E2
Figure: 1 (Impact of tariffs on demand and supply)
As per the above demand and supply graph, it is identified that changes in the import and
export tariffs will have major impact on the supply trends rather than in demand trends. This is
due to the reason that with the changes in import tariffs, the supply will change from S2 to S1
while the demand is constant in D1. This is same in the case of change in export tariffs. Thus, it
can be concluded that tariffs will only affect the supply trends and not the demand trends for any
country (Damijan, Konings & Polanec, 2014). It should be noted that in the recent years, New
Zealand is reducing their imposed tariffs. This is due to the reason that they are trying to position
themselves as free trade economy in the world with having minimal trade barriers for the
partners. Moreover, New Zealand is a small economy with no provision for strategic advantages.
Thus, presence of trade barriers will not attract any other countries for trading due to lack of
having market demand factors. Thus, offering free economy and absence of tariffs will pose
viability in the foreign investments and investors will be keen in trading with New Zealand
(Vossenaar, 2016). In the current scenario, countries should some sort of advantages in any form

9INTERNATIONAL TRADE
in order to stay relevant in the competition. However, New Zealand is not having any such
advantages in terms of market opportunities or strategic location advantage. Thus, offering free
economy will help them to gain competitive edge in the global business scenario.
In terms of the prices of goods or commodities, increase in the import tariff will increase
the final price of the products. This is due to the reason that in the final price of the product, cost
involved in paying the import tariff will also be included. Thus, the demand for the products will
get decreased with the increase in price. However, the change in demand will not pose any
changes in the demand curve due to the reason that the demand will get reduced for that
particular product and not for the entire generic commodity. Thus, with getting the product
imported, supply from the domestic goods will remain same and thus demand factor will not face
any changes (Khedlekar, Shukla & Yadav, 2013). In the case of export tariff, increase in the
tariff rate will increase the export of the products but it will also not have any impact on the
domestic demand scenario. This is due to the reason that domestic supply will not get hampered
due to increase in export as the export will only be done on the surplus products. Hence, the level
of surplus products will get increased and it will not affect the domestic demand factors.
Question: 6
Based on the given case scenario, it is concluded that a few new strategies or policies
should be initiated by the government of New Zealand in order to promote international trade. It
is recommended that extensive fiscal policies should be initiated by the government to increase
the cash flow in the economy as well as the purchasing power of the customers. Fiscal policies
will include increase in the public expenditure for infrastructural development (Kohl, Brakman
& Garretsen, 2016). Thus, more capital will be with the average customers and demand state will

10INTERNATIONAL TRADE
get increased. Increase in the demand state in the country will help in offering more market
opportunities for the foreign investors along with increasing the market attractiveness of New
Zealand as a potential economy. It should also be noted that increase in the cash flow in the
economy will force the domestic players in developing their business approaches, which will
increase their competitiveness and they can compete with the foreign players.
It is also recommended that tax benefits should be offered to the exporters of milk, meat
and fruits by the government of New Zealand. This is due to the reason that providing tax
benefits to the exporters will help to motivate them in enhancing their production process and
increase the rate of export. In addition, this will not only motivate the existing exporters but also
other firms to initiate the export process (Correia et al., 2013). For instance, the milk brands,
which are still not exporting milk to other countries, will be encouraged by getting the tax
benefits. This will ensure that surplus production for New Zealand will get increased and more
global market can be tapped. Provision of tax benefits will also attract the foreign players to
make New Zealand their export hub. This is due to the reason that they will want to tap the
facilities to be gained in New Zealand (Mertens & Ravn, 2014). Thus, it can be concluded that
offering tax benefits to the exporters will help New Zealand to gain a considerable position in the
global trading scenario.
Question: 7
In the current global trading scenario, there are number of roles being played by world
trade organization. One of the major roles being played by them is facilitating the smooth
operations of global trade between the countries by removing any potential barriers in the
process (Chaisse & Matsushita, 2013). In addition, world trade organization also provides the

11INTERNATIONAL TRADE
platform for negotiation for the member countries, where the countries having dispute in between
will be able to solve the issues with the consultation from them. Dispute settlement is another
role of world trade organization being played between the countries. There are different issues
and barriers being faced by the countries in the process of international trade and thus world
trade organization is having sets of standard rules and regulations. These rules are being
followed by all the member countries, which further helps to have universal standards in the
international trading process (Matsushita, 2014). They are also working with the leading funding
institutions such as World Bank and international monetary fund to bring cohesiveness in
initiating the economic policies. This can be concluded that world trade organization is working
towards achieving zero trade disputes between the countries and prevent any types of barriers in
the trading process.

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Part: B
Question: 1
In entering in the New Zealand market through Trans pacific partnership agreement, It is
recommended that IKEA should initiate the process of exporting in the initial stage. This is due
to the reason that New Zealand is a small country with having small population and thus market
opportunities are also limited. It will be a risky affair for IKEA in investing in New Zealand in
the initial stage. Thus, with the initiation of exporting mode of entry, they will be able to
understand the local market trends and preference pattern in New Zealand. Moreover, it should
also be noted that New Zealand is a developed country and thus the average purchasing power of
the customers is high (Masso & Vahter, 2015). This will help to have considerable number of
potential customers for IKEA even after entering through exporting. IKEA is having their
operational facilities in Australia and New Zealand is having free trade agreement with Australia.
Thus, the barriers in the forms of tariffs and taxes will not be in the case of IKEA. This will
ensure that IKEA will be able to offer their products in competitive pricing even after following
the exporting market entry strategy.
However, on the other hand, it should also be noted that even though exporting will help
IKEA to take lower risks and responsibilities in their foreign market operations but still they will
not be competitive enough in catering the local market needs. Moreover, exporting will also not
increase the brand identity and exposure in the market due to the lack of physical presence. Thus,
it is recommended that after the completion of the initial stage of operation and having the proper
understanding about the local market traits and trends, IKEA should opt for acquisitions (Gubik
& Karajz, 2014). This is due to the reason that with the help of acquisitions, IKEA will be able to

13INTERNATIONAL TRADE
have readymade operational facilities in New Zealand and based on this facility, they will be able
to produce local based products. This should be noted that market adaptability is important to
cater to diverse customer needs and preference patterns in the current market scenario. Thus,
with having own facility in New Zealand, IKEA will be able to produce products as per the local
market trends. This will ensure their long term viability in the market of New Zealand.
Question: 2
a.
Risks and uncertainties play a major role in creating barriers for companies while
achieving the competitive advantage. The identification and mitigation of the risks helps an
organization in maintaining the efficiency of the operations while operating in different
environments. The risks that are being faced by IKEA are enumerated in this section for the
suitable understanding of the different steps that might be undertaken by the business for
enabling sustenance.
 Market volatility and fluctuations in the global economies
 Lack of collaboration between the different stakeholders
 Lack of suitable inventory management systems affecting the supply chain
 Greater dependence of the organization o the suppliers
b.
Quantitative risk analysis
Risks Probability of the risk Cost of risk Expected Monetary

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occurrence Value
(Probability*Cost of
risk)
Market volatility and
fluctuations in the
global economies
60% $400,000 $ 240,000
Lack of collaboration
between the different
stakeholders
20% $200,000 $ 40,000
Lack of suitable
inventory management
systems affecting the
supply chain
30% $150,000 $ 45,000
Greater dependence of
the organization on the
suppliers
50% $230,000 $ 115,000
Qualitative risk analysis
Consequences
Risks and Likelihood Insignificant Mino
r
Moderate Major Catastrophic
Market Volatility (Almost
certain)
High

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Lack of Collaboration
(Likely)
Moderate
Lack of inventory
management (Likely)
Moderate
Dependence on suppliers
(Possible)
Low
c.
Risk response plan
Risk category Risk description Risk response Responsible person
Volatile market The high volatility of
the market would
affect the
organizational
initiative on investing
on assets for expansion
and growth
 Development of a
market
assessment team
consisting of
highly
experienced
market
consultants
 Undertaking
market
assessment,
which will help
Market analyst and
consultant

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the concerned
organization
while investing in
the foreign
markets
Lack of collaboration Lack of collaboration
between the different
departments in the
organization might
affect the productivity
of the same in
accordance to the
demand encountered
by the concerned
business
 Designing
suitable IS
(Information
System) between
the internal and
external
departments of
the organization
to facilitate
collaborative
functioning
IT manager
Lack of inventory
management
Lack of suitable
inventory management
might affect the supply
chain operations of the
business resulting to
minimized availability
of the products and
services in accordance
 Implementation
of the ERP
(Enterprise
Resource
Planning)
systems would
help the
Operational managers

17INTERNATIONAL TRADE
to the needs of the
customers
organization in
avoiding the risks
related to
inventory
management in
the organization
Dependence on
suppliers
High dependence on
the suppliers might
maximize the cost of
operations due to
higher bargaining
power of the suppliers
while operating in a
market
 Establishing
forward and
backward
integration and
in- house
operations in
order to control
the overall
operations from
sourcing the raw
materials to the
supply of the
finished products
in their own
outlets
Production manager,
departmental managers
and logistics manager
d.

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Risk monitoring and reporting
Goals Person
maintaining
the risk
register
Frequency of
reviewing the
plan and the
register
Frequency of
reporting
progress
Person
reported to
Frequency of
reporting
Market
assessment
Market
analyst
Every six
months
Once in three
months
Risk manager Quite often
Informatio
n System
IT managers 1 month Every week Risk manager Quite often
Enterprise
Resource
Planning
Operational
manager
3 months Twice a
month
Risk manager Often
Forward
and
backward
integration
Production
manager,
departmental
managers and
logistics
manager
3 months Twice a
month
Risk manager Quite often

19INTERNATIONAL TRADE
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