The rise of the intra-industry trade machines:

The rise of the intra-industry trade machines:

By Magister Ludi, Know Nothing Digest staff writer

 

Common sense dictates that when a country trades in a certain product, the country should either mostly import or export that particular product.  There would be an export of some products in the country and an import of some other different products.  This is considered inter-industry trade.  This is the case for most trade between countries, however there is much additional trade in which a country both imports and exports very similar or even the very same products.  These are often varieties of products that are such close substitute products that they are classified within the same industry, such as automobiles or perfumes or cosmetics or potato chips or soda or oil or chemicals and such.  This is known as intra-industry trade (Pugel, 2016.)

 

Intra-industry trade is where economies specialize to take advantage of increasing returns, ignoring differences in regional endowments. This allows countries to specialize in a limited variety of production and exploit the advantages of economies of scale without reducing the variety of goods available on the market.  This can be seen when Wal-Mart provides mass quantities of a particular set of brands of a particular selection of products because they are available at a large scale at a certain time in a certain region.  The product selection varies by fluctuations in the suppling firms that Wal-Mart deals with. The supply chain of these supply firms react to differing factors in the various sectors of the various products that are utilized to produce the products that are produced by these individual firms.  Country’s produce different products because of the cost reduction obtained by producing only a limited range of products (Krugman, 2006.)  There is regional inefficiency created by the limited runs of the limited range of items produced.  The demand for the products supplied shifts from time to time and region to region and firms must follow these trends to obtain maximum yield and profit.  Trade policies change from country to country through internal and external forces, these regional policies directly affect what firms produce and when they are able to produce it.  These are the developing reasons for Intra-industry trade.  Predicting market demand is not dissimilar to predicting the weather and the market forecast dictates what products and firms will remain viable.

 

Sources cited:

 

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World Economic Development Trio by James Connaughton

Brazil has the world’s eighth-largest economy.   China is the world’s largest economy.  The United States is the most technologically powerful country in the world (Index Mundi, 2018.)  China boasts a closed and centrally planned economy, while Brazil is aiming to slow the growth of government spending and decrease barriers to foreign investment.  The United States, which slipped behind China in 2014 as the world’s largest economy, allows private individuals and firms to make most of the country’s economic development decisions (Index Mundi, 2018.)

China is the United States third largest trading partner, just behind Canada and Mexico, which share a boarder with the United States, while China rests over 7000 miles away.  This doesn’t mean that the United States has a trade advantage over China, the truth is quite contrary.  The United States has lost many of its firms from agriculture, textiles, electronics and construction equipment industry sectors to many countries across the globe, but none of these foreign countries’ gains have been quite as speculated upon in recent years as those of the firms that have been lost to China.  Much of the United States’ three and a half million job losses (because of migrating U.S. firms) to China are criticized because of the Asian giant’s frequency to operate in practically unregulated environmental fashion.  China is just as often cited to violate or inadequately protect its country’s workers’ rights.  Despite the job and company losses, the United States shipped almost $120 billion USD worth of goods to China in 2016 alone.  China, in 2016, exported just under 5 billion USD worth of goods to the United States (Yu, 2017.)

It must be remembered that China and the United States are both competitors and trade partners in the global market.  Companies flocking from U.S. shores like refugees to the ports of Guangzhou cannot be dismissed as a pure loss to the United States.  Using the one-dollar, one-vote metric, both countries become winners and losers in this employment opportunity exchange program.  Within each of these economically powerful countries the import goods consumers are winners from the opposite country’s producers of exported goods.  The shift from no trade, to free trade, increases overall market price in the long run (Pugel, 2016.)

China’s currency valuation and high debt levels continue to be a concern to the global economy as well as the foreseeable outlook of China’s foreign exchange policy. (FRB of Atlanta, 2016)

That being said, different countries have different advantages in producing goods for export.  Soil differences between the United States and Brazil give the U.S. an advantage over wheat production and Brazil an advantage in the production of coffee.  This in itself gives Brazil the power to control the U.S. production level in its entirety because of Brazil’s control over the U.S.’s energizing morning beverage of choice.  Productivity humor aside, the comparative advantages of these two very differently skilled countries illustrates clearly Adam Smith’s main points in his argument for international trade enabling as opposed to trade restriction for mercantilism-style self-preservation (Pugel, 2016.)

Brazil is continuing in economic reforms begun in 2016 to strengthen the workforce and industrial sector.  China’s reforms have resulted in efficiency gains that have increased GDP tenfold since 1978.  The United States faces long-term stagnation of wages for low-income families and inadequate investments in the country’s deteriorating infrastructure.  The United States seeks to renegotiate trade agreements with its close trading partners in the region under the North American Free Trade Agreement, popularly known as NAFTA.  Brazil and China are now experiencing the high points of their involvement in their own regional trading partner grouping.  BRICS, a widely popular acronym for five major EMEs: Brazil, Russia, India, China and South America is the current trade facilitating wonder of the world.  This economic block includes over 40% of the world’s population, a staggering segment of the consumer population of humanity (Index Mundi, 2018.)

China is a key trade partner for Brazil.  Although China is currently a main provider of goods for export to the rest of the world, including most significantly to us, the United States.  The huge economic advance of China is expected to change around 2030.  At this time, much of the population of China will have aged and there will be a higher demand for imports such as agricultural products and foodstuffs.  This is a key turning point for the Brazilian economy to prosper.  Currently, China exports to Brazil double what it imports from the South American country (World Bank, 2014.)

The rising youth population in Brazil and foreign direct investment at a record high of $15.4bn are fueling calls for economic optimism and further regional development.  Jaguar Land Rover opened a new factory in Brazil in 2016 at a cost near 300 million USD.  This is despite the fact that Brazil’s economy contracted for the second straight year (Leahy, 2017.)

Brazil’s government is a concern for regional stability, reflecting upon the 2014 Lava Jato (car wash) scandal.  This was a vast kick-back scheme led to the imprisonment of oil company, meatpacking and state-owned oil company magnates along with the disgrace of most of Brazil’s political parties and leaders (Londoño, 2018.)

Another comparative advantage of interest is China’s interest in Brazil’s largest and most popular social program: Bolsa Familia, a response to decades of regressive social policies and non-inclusive growth models.  Bolsa Familia was started in November of 2003 with half a percentage of GDP and has halved the country’s extreme poverty.  This is a reported change of 9.7 to 4.3 of the population.  A country with a population the size of China dreams of this feat of economic mobility.  Bolsa Familia reaches on quarter of the population.  The main points to be considered here are that Brazil entrusts poor families with small cash transfers in exchange for keeping children in school and attending preventative health care visits.  This is how Brazil has broken the transmission of poverty to the children from their parents (Wetzel, 2013.)

When comparing the economic advantages between the United States, Brazil and China, we see that the United States is known as the international community’s most technologically advanced and powerful economy and that Brazil is known as powerful international leader in manufacturing, mining, agricultural and service sectors, while China is known as the leading exporter of commercial goods.  As the international community (China, Brazil and the United States specifically) continues to develop, the global population configurations and technology advantages are changing.  Free trade leads to a fully efficient outcome for the world and for our focus countries in the material we have covered here in brief (Pugel, 2016.)

Sources cited:

·      FRB of Atlanta, 2016, Trade Dynamics and China, https://www.frbatlanta.org/economy-matters/2016/09/20/trade-dynamics-and-china-part-three

·      World Bank, 2014, Brazil vs. China: how to avoid an economic slowdown, http://www.worldbank.org/en/news/feature/2014/07/15/brasil-china-brics-exportaciones-desaceleracion-economia

·      Leahy, J., 2017, Business bets on Brazil economic rally, Financial Times, https://www.ft.com/content/ab46f7ec-e4d9-11e6-8405-9e5580d6e5fb

·      Londoño, E, Darlinton, S, 2018, Leftist Lion and Far-Right Provocateur Vie for Brazil Presidency, The New York Times, https://www.nytimes.com/2018/01/20/world/americas/brazil-lula-bolsonaro-election.html

·      Wetzel, D, 2013, Bolsa Famíia, World Bank, http://www.worldbank.org/en/news/opinion/2013/11/04/bolsa-familia-Brazil-quiet-revolution

·      Nation Master, 2018, http://www.nationmaster.com/country-info/compare/Brazil/United-States/Economy

·      Yu, R., 2017, U.S. – China trade scorecard, USA Today, https://www.usatoday.com/story/money/2017/04/04/united-states-china-trade-relations/99989116/

·       Pugel, T, 2016, International Economics 16th edition.

·      Index Mundi, United States Economy profile, 2018, https://www.indexmundi.com/united_states/economy_profile.html

·      Index Mundi, Brazil Economy profile, 2018, https://www.indexmundi.com/brazil/economy_profile.html

·      Index Mundi, China Economy profile, 2018, https://www.indexmundi.com/china/economy_profile.html

The international legal cost of carriage of goods, a courier economic fable

By: Rehtafeht Johannus Lihp , staff writer

The main costs associated with international law in relation to contractual relationships are tied to logistics and transportation of goods.  Transportation guidelines in CISG carrier contracts for goods cover shipment and transshipment and in-transit contracts.  It does not matter which contract type is used, for our purposes it is enough to know that the risk of loss will not pass from seller to buyer until the goods are identified to the contract or otherwise available at the buyer’s disposal.

Transportation costs vary upon several factors including the number intermediaries.

Fortunately, a similar procedure is followed whether transporting goods by truck, rail or air. Intermediaries involved in the transportation of goods include warehouse workers at customs houses and port authorities, ship crew, freight forwarders and stevedores.  A stevedore formerly was a term synonymous with longshoreman or dock worker, however since the shipping container revolution of the 1950s dockworker jobs were cut down to a 10th of pre-revolution employment level.  Currently stevedores refer to firms that contracts with ship owners or a port that charters ships or loads and unloads ships.  Formerly stevedores were answerable to the ships logistics masters, and now a term for the masters themselves (Maclachlan, 1875, p.387.)

Another complication factor impacting contractual law of international transportation is that of the insurance of goods under carriage.  Maritime law is a universe unto itself.  In maritime logistics contracting the parties choose who is responsible for the purchase of the maritime insurance and who is to benefit from it.  Due to risk of loss, both parties has significant interest in seeing that the goods are properly insured during the duration of the transportation process and from carrier to carrier, freight forwarder to freight forwarder.  Aircraft carriage of goods regulations functions similarly to maritime transportation, but aircraft carriage is regulated by the 1929 Warsaw Convention.  This convention was formerly known as the Convention for the Unification of Certain Rules Relating to International Carriage by Air, but then there weren’t enough words left to use in the convention itself (August, 2009, p.581,607,610.)

Sources:

  • Machlachlan, D., (1875), A treatise on the Law of Merchant Shipping
  • August, Mayer and Bixby, 2009

Research funded in part by the Organic World Trade Organization.