Comparative Advantage
Comparative advantage refers to a country's ability to produce specific commodities or services at a lower opportunity cost than other countries. Nations with comparative advantage may not produce the best products in the world, but the benefits of purchasing their goods or services outweigh the drawbacks. Countries weigh the cost of producing a good or service against the cost of importing it. Historically, exporting products was easier than exporting services. Technology advancements and internet access have made it simple to export. Because of connectedness, call centers, entertainment, and banking services can be quickly swapped. (Neary, 2003). The US used the theory of comparative advantage to trade with other countries. The major exports of the US between the years 2000 to 2010 was crude oil, diamonds, semiconductors, auto spares and civilian aircrafts. The countries that traded with the US during this decade were Chile, Australia, China, Israel, etc. Refined petroleum, corn, civil aircrafts, diamonds, wheat was the major US exports to these countries. The US offered to help build democratic institutions, promote the development of socioeconomics of the trading partners. Additionally, it offered to improve the services market, access to telecommunications, computer-related services, energy sectors, professional services, education and training, financial services and insurance.
Trade Barriers and WTO
The trade between the US and other countries has always faced trade barriers. The barriers occur as a result of nations not adhering to the agreements made initially by the two parties and regulation set out by the World Trade Organization (WTO).In 2008 China had developed barriers to trade by enacting policies and practices that were against the WTO commitments. The industrial systems by China sought to protect and promote China's domestic industries. Policies regulating imports and exports in China affected goods such as steel. Steel and Iron Industry Development policy of 2005 created barriers that required all companies investing in steel Iron industry should have a proprietary technology and knowledge in the processing of steel. Foreign investors were not allowed to have a controlling share in the industry meaning that the technology by the investor was transferred to the Chinese. Investors in steel company were required to use steel products and machinery and import only when it was not available in Chinese market. High taxation leveled on imported goods from the US by the trading partners was also a significant barrier. (Bergsten, Hufbauer, & Miner, 2014).
Impact of Trade Barriers
The trade barriers discouraged investment by US investors due to the regulations fixed by trading partners. It also reduced the flow of trade since most policies protected domestic industries. Advantages of these barriers were, US investors were able to use the cheaply available material for their enterprises in China. The Barriers enabled trade negotiations to be done to prevent barriers in other sectors of trade; this helped the US shape trading experiences in years after this decade.
Open Market Economy
An open market economy involves production and sale of goods and services without interference from the central government. Supply and demand dictate prices. The advantage associated with the open market the free will of business owners to invent new products and services needed by the customer without relying on the government agencies to dictate what the people need. Customers make the final decision as to whether a product survives or fail. They also dictate the prices of goods and services by hesitating to buy if the rate is high. (Mankiw, 2014). Open markets come with disadvantages too. Dangers of profit motives by companies arise. Companies sometimes sacrifice environmental standards, the safety of workers and ethical issues to maximize profits. The oil spill in deep waters in the US was the biggest ecological disaster attributed to substandard measures in its construction. Goods and services that do not attract more profits are neglected. In an open market, a local dispensary is not worth venturing into due to less profitability making locals to suffer because of lack of access to medical care.
References
Bergsten, C. F., Hufbauer, G. C., & Miner, S. (2014). Bridging the Pacific: Toward Free Trade
and Investment between China and the United States. Peterson Institute for International
Economics.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Neary, J. P. (2003). Competitive versus comparative advantage. The World Economy, 26(4),
457-470.
