International Trade

International Trade

Task 1: Pattern of Inter-Industry Trade between UK and Kenya and UK and Nigeria for 2018 for the Pharmaceutical and Food Sectors and Evaluation of Consistency of the H-O Model

Comparison Report of Trade between the UK and Kenya and UK and Nigeria for 2018

Examining trade data for 2018 between the UK and Kenya and the UK and Nigeria for the pharmaceutical sector, Kenya exported chemicals worth US$ 1,208,530 to the UK and imported chemicals worth US$58,313,520 from the UK while Nigeria exported chemicals worth US$ 214,830 to the UK and imported chemicals worth US$97,313,750 from the UK (see figure 1 and 2) (World Bank, 2022a; World Bank, 2022b). For the food sector, Kenya exported vegetables and food products worth US$381,620,760 to the UK and imported vegetables and food products worth US$35,344,120 while Nigeria imported food products worth US$109,326, 390 from the UK and exported food products worth US$13,388,300 to the UK (see figure 1 and 2) (World Bank, 2022a; World Bank, 2022b).

Figure 1: Product imports and exports between Kenya and the UK in 2018 (World Bank, 2022a)

The H-O model emphasizes the benefits of international trade where countries focus on exporting the resources that are naturally abundant (Baldwin, 2018). Examining the consistency of the H-O model in the case of the UK and Kenya, there is an equilibrium of trade. Kenya exports a significant quantity of vegetables and food products that are naturally abundant and imports chemicals for the pharmaceutical sector. therefore, Kenya’s exports in the food sector balance the imports in the pharmaceutical sector.

Figure 2: Product imports and exports between Nigeria and the UK in 2018 (World Bank, 2022b)

In the case of the UK and Nigeria, there is a disequilibrium of trade between the pharmaceutical and food sectors. Nigeria has high imports from the UK and low export levels to the UK in both the pharmaceutical and food sectors. Therefore, pharmaceutical and food products’ raw materials are not naturally abundant in Nigeria compared to the UK.

References

 

 

 

Task 2: IIT Indices for the USA and the UK Trade for the Pharmaceutical and Food Industries for Year 2019

IIT Indices Calculations and Report for Comparison between the Pharmaceutical and Food Industries

USA Pharmaceutical and Food Industries

Industry Exports (X) Imports (M) X-M X+M
Pharmaceutical Industry US$174,570,414,390 US$244,991,129,530 70,420,715,100 419,561,543,920
Food Industry US$112,515,005,000 US$132,635,627,000 20,120,622,000 245,150,632,000

Table1: Export and Import Data for the USA in 2019 (World Bank, 2022b)

IIT Index = 1- ((X-M)/X+M)

Pharmaceutical Industry = 1- (70,420.715,100/ 419,561,543,920) = 0.8321

Food Industry = 1 – (20,120,622,000/ 245,150,632,000) = 0.9179

UK Pharmaceutical and Food Industries

Industry Exports (X) Imports (M) X-M X+M
Pharmaceutical Industry US$59,717,698,080 US$60,584,033,700 866,335,620 120,301,731,780
Food Industry US$23,873,029,800 US$52,818,469,400 28,945,439,600 76,691,499,200

Table1: Export and Import Data for the UK in 2019 (World Bank, 2022a)

 

IIT Index = 1- ((X-M)/X+M)

Pharmaceutical Industry = 1- (866,335,620/ 120,301,731,780) = 0.9928

Food Industry = 1 – (28,945,439,600/ 76,691,499,200) = 0.6226

Examining the IIT indices for the pharmaceutical and food industries for the USA and the UK, the indices’ values are between 0 and 1. An IIT index of 0 indicates that the country is involved in fully inter-industry trade while an index of 1indicates that IIT is maximum hence the country is fully intra-industry (Riche et al., 2022). Therefore, the USA and UK are involved in partial intra-industry trade for both the pharmaceutical and food industries. Notably, the IIT index for the UK pharmaceutical industry is 0.9928 which is close to 1 hence it is likely that the pharmaceutical sector in the UK is fully intra-industry hence the UK is involved in the international exchange of similar pharmaceutical products. On the other hand, the IIT index for the UK food industry is slightly lower compared to the pharmaceutical industry indicating that the UK engages in inter-trade of food products according to its competitive advantages.

References

 

 

 

Task 3

Regionalism vs Multilateralism

Regionalism mostly appears in the form of free-trade area agreements and customs unions. The main purpose of free-trade agreements is to facilitate trade between members of the economic territory (Martonyi, 2017). Although free-trade area agreements have historically been established by states with close geographic proximity, other factors such as economic policies, geopolitics, and supply chains have emerged as drivers behind the establishment and shaping of regional trade agreements (Barnekow and Kulkarni, 2017). The institutional arrangements enacted through free-trade agreements and customs unions facilitate the coordination of foreign economic policies between states and the free flow of goods and services (Barnekow and Kulkarni, 2017). Regionalism eliminates or reduces custom duties among the member states through free-trade area agreements and enables economic integration to a greater extent by applying a common external tariff through custom unions. Key advantages of regionalism include the improvement in the implementation of best practices through the reduction of practice variation, reduced trade costs, and unrestricted flow of goods services and factors of production such as labour (Barnekow and Kulkarni, 2017).

Multilateralism involves the organisation of economic relations between states that focuses on trade creation by reducing tariffs and making it easier for companies to import and export through the standardisation of import and export procedures (Martonyi, 2017). The World Trade Organisation operates under the principle of multilateralism. Notably, signatories to multilateral agreements receive fair trade treatment. Compared to regionalism that allows member states to provide better trade deals to each other, multilateralism provides a level playing field for all member states regardless of their geographic proximity. Further, multilateralism standardises commerce regulations for all member states which is critical in handling trade disputes (Martonyi, 2017). However, regionalism provides greater benefits for member states through trade diversion where the member states divert their trade from an efficient exporter towards a less efficient one which is likely to reduce the cost of goods (Barnekow and Kulkarni, 2017). Furthermore, regionalism enables member states to have greater visibility in the global market and bargaining power since the member states are able to coordinate their positions in international trade negotiations (Barnekow and Kulkarni, 2017).

Are Both Regionalism and Multilateralism Possible to Implement in Theory and in Practice

It is possible to implement both regionalism and multilateralism in practice but not in theory. In theory, regionalism seeks to increase trade between members through customs unions and free-trade agreements through the application of external common tariffs to non-members (Martonyi, 2017). However, multilateralism is founded on the principle of fair and efficient trade where all members receive fair treatment through the standardised trade procedures hence the application of external common tariffs in regionalism does not provide fair treatment to external members (Martonyi, 2017). However, in practice, regionalism and multilateralism have been implemented where countries in different regions have signed free-trade agreements and customs unions while being part of the international trading system governed by the World Trade Organisation. Despite the global geopolitical shifts, the multilateral trade regulations particularly the dispute settlement system of the World Trade Organisation functions satisfactorily.

References

  • Barnekow, S. E., & Kulkarni, K. G., 2017. Why Regionalism? A Look at the Costs and Benefits of Regional Trade Agreements in Africa. Global Business Review.
  • Martonyi, J., 2017. Multilateralism and Regionalism in International Trade Law. Elte Law Journal, 2, 135-142.

 

 

Task 4: Extent of Tariffs Imposed on a Range of Manufactured Products

Tariffs increase the price of products for consumers and often lead to a decline in imports. Tariffs are a common barrier of trade that focus on protecting domestic industries, remedying trade distortions, and source of revenue. Consumer goods are a wide range of manufactured products. The chart below illustrates the Most Favoured Nation (MFN) average tariff line in percentage for consumer goods between 2012 and 2019.

Figure 3: MFN average tariff lines for consumer goods in the United Kingdom (World Bank, 2022)

The graph above indicates an increase in the average MFN tariff for consumer goods between 2012 and 2019. Notably, the increase in the MFN tariff by the UK is likely due to the need to protect domestic industries that manufacture similar consumer goods. Reviewing the data between 2012 and 2019, the UK has gradually increased tariffs on consumer goods indicating that there has been a subsequent increase in the prices of imported consumer goods ensuring that the domestically manufactured consumer goods are competitive (World Bank, 2022). The imposition of the MFN tariffs is necessary since, in addition to protecting domestic industries, they provide the UK government with additional funds that can be used to support projects. There are unwanted effects of the tariffs. For example, the imposition of the tariffs is likely to result in the lack of access to quality and competitive imported products by consumers in the event the locally manufactured products do not meet the quality and customer standards. With globalisation and increased connectivity, tariffs represent a bad policy since they act as a form of trade restriction (Mandelman and Waddle, 2019). Moreover, the tariffs can be considered to be a bad policy since they are mainly used to limit market access rather than protect domestic industries.

References

 

 

Task 5

Role of Exporting in the Dynamic Process of Economic Growth

A trade surplus which is achieved by high levels of export compared to imports contributes to economic growth. There exists a positive relationship between exports and aggregate demand where an increase in exports results in an increase in aggregate demand and consequently the country’s economic growth (Zaman et al., 2021). Increased exporting activities indicate that a country’s industrial facilities and factories are achieving high output levels and a significant proportion of the population has access to employment. Further, exporting indicates that a country acquires an inflow of funds which results in the stimulation of consumer spending and consequently economic growth. Further, exporting activities have an effect on a country’s gross domestic product (GDP). When applying the expenditures method in calculating the GDP, consumer spending, and government spending on public goods and services, imports, and exports are important components (Zaman et al., 2021). With regards to consumer spending, an increase in the export levels reflects an increase in the flow of funds within a country which indicates an increase in consumer spending. Further, with an increase in the inflow of funds as a result of exports, governments are able to increase their spending on public goods and services (Latief and Lefen, 2018). Therefore, an increase in exports results in an increase in the GDP which reflects economic growth. Moreover, an increase in exports contributes to the decrease in a country’s account deficit (Latief and Lefen, 2018). Notably, a large and persistent account deficit is attributed to poor export performance. Therefore, in order to achieve economic growth, it is necessary for countries to increase their exporting activities. notably, in order to derive economic growth, exports should be of high quality and value added and highly competitive in the global market.

 

 

 

 

The connection between Inward FDI flows of the Pharmaceutical Manufacturing Industry and the Country’s Exporting from the Industry

Figure 4: Inward FDI flows of the UK pharmaceutical industry (Clark, 2022)

Figure 5: Inward FDI flows of the UK pharmaceutical industry (Clark, 2022)

Figure 6: UK pharmaceutical industry export data (United Nations Conference on Trade and Development, 2020)

The inward FDI flows in the pharmaceutical sector in the United Kingdom illustrated in figures 4 and 5 highlight the value of inbound FDI flows into the UK from different countries. Japan had the highest FDI value of 305 million pounds (see figure 5) followed by the UK offshore islands with an FDI value of 248 pounds (see figure 4) (Clark, 2022). The high FDI values indicate that a large proportion of foreign investors in the UK are from Japan or the UK offshore islands. Notably, the Netherlands has the greatest negative value of 193million pounds (see figure 4) indicating large disinvestment in the UK’s pharmaceutical sector (Clark, 2022). Evaluating the UK’s pharmaceutical industry export data, there was a significant decline in the pharmaceutical products exports. Further, reviewing the FDI charts, it is evident that the UK pharmaceutical has outward FDI flows in more countries than in inward FDI flows. This indicates that UK investors have invested in the pharmaceutical industries in other countries. Notably, an increase in the FDI inflows is likely to result in increased exporting activities due to an increased flow of funds that support the setting up of industrial facilities (Latief and Lefen, 2018). Further, high inward FDI inflows indicate that there is an increase in investment which is likely to increase output and consequently an increase in the export levels (Latief and Lefen, 2018). However, comparing the figures illustrating the FDI inflows and export data of the UK’s pharmaceutical industry, there is no direct relationship between FDI and exporting activities. the lack of connection between foreign investment and exporting can be attributed to the decline in domestic investment.

References

 

 

Task 6

Benefits and Costs of a Fixed Exchange Rate System for International Traders of a Developing Country

The fixed exchange rate system is applied when a country maintains its currency at a specific level against another currency (Bodea, 2017). The principle behind the fixed exchange system is the reduction of currency uncertainty which creates greater confidence for investors especially entities involved in exporting activities (Bodea, 2017). The costs associated with fixed exchange system include deflation of the economy and high-interest rates that are applied to maintain the target value of the currency (Bodea, 2017). One of the benefits of applying the fixed exchange rate system for international traders is that they avoid currency fluctuations (Mao et al., 2019). For example, currency fluctuations such as the rapid appreciation of the pound are likely to make exports uncompetitive in the global market making the international traders that deal with exporting activities suffer losses. Moreover, a devaluation of a currency is likely to increase the costs of imported raw materials and products which may reduce the profitability of the manufacturing company (Mao et al., 2019). Further, encouraging investment by offering stability, a fixed exchange rate system encourages international traders to invest and provides greater certainty (Mao et al., 2019). Moreover, a fixed exchange rate system ensures that the international traders that are involved in manufacturing are able to manufacture and export products without affecting their current account (Mao et al., 2019).

 

Why Forward markets are useful for importers and exporters of countries operating with floating exchange rate systems

The floating exchange rate system occurs when a country’s currency price is determined by the forex market as a result of the demand and supply of the currency which is relative to the other currencies (Chamon et al., 2019). The floating exchange rate system provides stability in the balance of payment. Therefore, for importers and exporters, operating with the floating exchange rate system, they are able to determine the level of investment and how to balance their payments (Chamon et al., 2019). For example, in case of depreciation of currency, exports are likely to be cheaper hence an increase in demand. Therefore, since the currency value is driven by demand and supply in the foreign exchange market, an equilibrium would be achieved. Moreover, the use of the forward markets with a floating exchange rate system protects importers against import inflation (Henao and Guhr, 2022). The floating exchange rate eliminates the likelihood of surpluses in the balance of payments triggering higher import costs (Henao and Guhr, 2022). The forward markets are useful for importers and exporters since they provide protection against uncertainties in the future where importers and exporters are able to retain commodities that they need to exchange in the future (Henao and Guhr, 2022).

Evaluate whether the market was impacted by the News

Figure 7: US dollar/UK pound exchange rate (Exchange Rate, 2022)

The chart above illustrates the US dollar/UK pound exchange rate over one month period. Between February 11th and 23rd, the exchange rate is low indicating a drop in the value of the dollar against the pound. The period between Feb 11th and 23rd may be considered to be the period that was characterised by heightened tension between Russia and Ukraine (Maass, 2022). More specifically, the exchange rate was lowest on Feb 17th which was the day that was reported that the US and NATO stated that there was no evidence of Russia pulling back and the release of Trump’s White House visitor logs (Maass, 2022). Therefore, the foreign exchange market is impacted by the News.

References

  • Bodea, C., 2017. Fixed exchange rates with escape clauses: The political determinants of the European Monetary System realignments. European Journal of Political Economy, 39, 25-40.
  • Chamon, M., Hofman, D., Magud, N. E., and Werner, A., 2019. Foreign exchange intervention in inflation targeters in Latin America. Washington, D.C.: International Monetary Fund.
  • Exchange Rate, 2022. Best Pound to Dollar Exchange Rate Today. https://www.exchangerates.org.uk/Pounds-to-Dollars-currency-conversion-page.html
  • Henao, J. C., and Guhr, T., 2022. Foreign exchange markets: Price response and spread impact. Physica A: Statistical Mechanics and Its Applications, 589, 2022-3.
  • Maass, H., 2022. 10 things you need to know today February 17, 2022. The Week. https://theweek.com/briefing/daily-briefing/1010288/10-things-you-need-to-know-today-february-17-2022
  • Mao, R., Yao, Y., and Zou, J., 2019. Productivity growth, fixed exchange rates, and export-led growth. China Economic Review, 56, 

 

 

Task 7

Impact of Exchange Rate Volatility on International Trade

In an efficient market with investors, the exchange rates reflect on anticipated changes of demand and supply of two currencies (Cauwenberge et al., 2021). Despite the anticipated changes in demand and supply of currency, there are periods where the variable changes over time are of a greater magnitude. The large magnitude of variable changes contributes to exchange rate risk. As such, exchange rate volatility increases risk and limits international trade and investment decisions. Specifically, exchange rate volatility is likely to result in significant losses among importers, particularly in cases where items purchased at a particular time require payment after shipment which may take a considerable amount of time (Bahmani and Gelan, 2018). In the event the value of the currency declines, it is likely that the importer will incur losses since the costing before shipment had been done based on the prevailing exchange rate. Further, exchange rate volatility makes it difficult for international investors to make informed decisions on the best place to invest since fluctuation in the exchange rate can result in substantial losses (Latief and Lefen, 2018). Moreover, when traders face higher costs and transaction risks due to exchange rate volatility, they tend to decrease their trade volume (Latief and Lefen, 2018).

 

 

 

 

 

 

 

 

 

 

The connection between the Exchange Rate Volatility on Exporting Performance

Figure 8: UK pound/US dollar exchange rate (Exchange Rates, 2022)

The exchange rate chart above (see figure 8) illustrates the UK pound/US dollar exchange rate between 14th December 2021 and March 2022. Examining the chart, the value of the pound against the dollar underwent variable changes to a greater extent and declined in the month of January 2022. With regards to export data for the UK, in January 2022, the total imports increased by 11%, exports decreased by 8.7%, while total trade in goods increased by 43.1 billion pounds (Office for National Statistics, 2022b). Examining the exchange rate and trade data, there is a decline in the value of the UK pound, an increase in imports, and a decline in exports. A decline in the currency exchange rate triggers an increase in export activities especially when trading using the dollar. Further, it is expected that with a decline in the exchange rate, there would be a decline in imports since the traders would have to pay more for the imported commodities. Therefore, there is an insignificant connection between the exchange rate and exporting performance

Are the findings consistent with selected exchange rates?

The findings are not consistent with the selected exchange rates. For example, in the month of December 2021, the exchange rate was highly volatile with sudden changes especially between 14th December and 23rd December where despite the sudden changes in the exchange rates, the UK recorded a 3.9% increase in total export goods and 7.4% increase in the total exports to EU countries. the reaction of exporters and importers to the changes in the exchange rate in December 2021 is not consistent with that of January 2022 (Office for National Statistics, 2022a).

References

 

 

 

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