In this report, as a member of the government of the nation on the periphery of Europe currently, I will recommend 11 issues related to the free trade, the balance of payment, single currency and etc. And I will give every of them my understanding and analysis to figure out why our nation should choose to join EU and what could we get through joining it as well as the advantages and risks.
On the basis of the report, I supposed to do the project in order to give the introduction and commentary of the following contents: free trade, absolute and comparative advantages, trade protectionism and barriers, WTO and EU, the balance of payments and how it affected by exchange rate, general trend in UK over last 30 years, single currency and less developed country. All of these contents will be explained specifically as following.
Section 1: Free trade
Free trade is defined as the trade based on the unrestricted international exchange of goods with tariffs used only as a source of revenue, which means one country can trade with another wherever they are in the world. For example, following the Phoenicians, the Greek and Romans established trade routes goings as far out as Britain in the West, and China in the East. The Greeks spread their culture and ideas through this trade, and the Romans spread their organization and laws.
It was a truism back then as it is today, that free trade tends to make the traders quite wealthy, and thus it formed the basis for Athenian, and later Roman power. There are several main advantages of the free trade. First, increased world-wide out-put: without any trade restrictions between countries, more countries are willing to accept export, which improves the exchange and communication and promote the economic develop. Second, goods and services provided at a lower cost: by increasing the production, countries increase their efficiency.
By specializing, countries better allocate their resources and purchase cheaper resources from other countries. Third, bigger range of commodities for customers with more choices: as free trade leads to a global market, consumers benefit from the competition and variety brought to the market, when other countries produce some items cheaper, the consumer purchases products for less. Forth, increasing the total living standard—– as the trade expands, the competition also expands. To stay competitive, companies must seek ways to create the comparative advantage.
This leads to increased innovation that improves products. So with the development, people will be lead to a better quality of life. Fifth, producers can gain the benefits of economics of scale (multi-nationals): producers can learn the experience from other countries’ companies and through these technologies improve themselves. Fifth, minimizes wars: as countries work together professionally, mutual respect for the countries’ customs and cultures increase. Fears and prejudices diminish, and countries are less likely to fight each other.
Section 2: Absolute ; comparative advantages
In economics, absolute advantages refers to an individual, a firm or a country can produce a same quality of good or service more cheaply than others under the same resource. For example, Vietnam can produce 1000 million tons of rice while South Korea can produce 800 million tons of rice, so Vietnam has absolute advantage (since it can produce more than Korea). Comparative advantages refers to an individual, a firm or a country have the ability to produce a particular good or service which at a lower marginal and opportunity cost than others. Same example of Vietnam and Korea.
To produce 1 more tones of rice, Vietnam has to give up producing 3 cars. However, to produce 1 more tones of rice, South Korea only have to give up producing 1 car. There is a lower opportunity cost for Korea to produce rice. So South Korea has the comparative advantage. According to the balance of payment of UK and other countries, the comparative advantage of UK mainly depends on the following areas: oil, chemical and pharmaceuticals, aerospace, medical technology, insurance, financial service, computer service and software, other business service and entertainment. And if UK still operates structural trade deficits, it will lose the comparative advantage in textiles, steel, coal and many other areas of traditional manufacturing industry.
Section 3: trade protectionism and barriers
Protectionism is the measure took by government on trade goods and services between countries in order to import restriction. For example, protect sunset industries, protect strategic industries and cure persistent balance of payment deficit. Governments use the protectionism to control the free trade and make sure that the major projects prefer the domestic rather than foreign countries.
The protect measure against the principle of free trade within the EU single market, but it good for the developed countries in the west Europe, for example, they not allow the oversea companies involved in building transport infrastructure projects. Trade barriers are government restriction on international trade, it mainly refer to the imposition of some sort of cost on trade that raises the price of the traded products. The barriers have many forms, for example, the tariff barriers, which are taxes or customs duties placed to artificially raise their prices and suppresses domestic demand for them. UK had a specific tax on imported car, purpose to protect the UK automobile industry from other countries competition. Another example refer to non-tariff barriers, one of it is quota, which limited the quality of import.
Section 4: WTO ; EU
WTO is an organization designed for supervise and liberalize international trade, it oversees the implementation, administration and operation of the covered agreement and also provides a forum for negotiation and for setting disputes.
In order to ensure the open and fair competition in free trade, WTO has a set of safeguard treatment measure to protect every member countries’ concessions, such as tariff increase, quantitative restriction, tariff quota, additionally, it also can take antidumping and anti-subsidy measure to ensure the international trade processing on the fair way. There is an example of American companies charge the Chinese juice dump them in 1998, after tough appeal, the America state trade commission judged the tax of anti-dumping is 51. 4%. The European Union (EU) is an economic and political union of 27 member countries which are located primarily in Europe. The EU has established a single market across the territory of all its members. A monetary union, the eurozone, using a single currency comprises 17 member states. The single market involves the free circulation of goods, capital, people and services within the EU, and the customs union involves the application of a common external tariff on all goods entering the market.
Once goods have been admitted into the market they cannot be subjected to customs duties, discriminatory taxes or import quotas, as they travel internally. For instance, Vietnam become the member of the EU 2005, then in 2011 the value of bilateral trade between Vietnam and EU reached $243 billion, include main export products shoes, textiles, coffee, woodworks and aquatic product, made EU becomes the biggest investor of Vietnam, which significantly improve economic develop and bring huge profits to both of the two parts.
Section 5: The balance of payments ; the affection by exchange rate
The balance of payment is record of all financial transaction between country and the international economy. The structure of it includes several fields: Current Account measuring Trade in Goods and Services; Capital Account which tracks Capital flows into and out of the UK; the Financial Account which dealing with the flow of direct portfolio and investment and reserve assets; net errors and omissions. For example, there is a balance of payment statement of UK in 2008 following:
The exchange rate is the price of a currency in terms of other currencies. It’s effect on Balance of Payments will depend upon its relationship with other currencies and how its value will change. If the exchange rate rises then the country’s goods and services might suffer and demand from abroad could fall. If the exchange rate of a country falls the country’s goods and services would become internationanlly cheaper and lead to more goods and services being purchased. However,, if demand remains the same then the value of goods and services to the country will reduce and the current account balance may deteriorate.
Section 6: General trends in UK over the last 30 years
According to the two programs above, over the past thirty years the UK economy has undergone huge structural changes. In 1950 this country was a great industrial power with more than a third of its labor force employed in the manufacturing sector and a further million in coal mining. There was a trade surplus in manufactured goods equal to 10% of GDP and the country was a net exporter of energy. Since then, employment in the manufacturing sector has shrunk dramatically and coal mining has almost disappeared.
There is now a trade deficit in manufactured goods equal to 4% of GDP and, after an interlude following the discovery of North Sea oil, the UK is now a large net importer of energy. The gap left by the decline of our traditional industries has been filled by a whole range of service activities, which now account for the bulk of employment and, collectively, earn a valuable trade surplus. In addition, the country enjoys significant net earnings in the form of interest, profits and dividends from international investment.
Section 7: Advantages and disadvantages of single currency
Advantages of single currency: one is reduce the costs which firms and individuals do not have to pay as they move themselves or goods services from one Euro country to another; two is reduce the exchanges rate uncertainly which UK pound will be at the same rate for all members. Disadvantages of single currency: one is transitional cost mainly those of changing systems, such as tills, computerized system and other apects includes staff training; two is inability to devalue independently individual government lose this policy instrument.
Section 8: How single currency effect the individuals and businesses For individuals, it reduce the scope for price discrimination and will help create pressure to keep prices low, and the it also bring down the transaction cost as people travel aboard they do not need to change the currency, furthermore, it also make the price transparent. For business, it increased foreign investment, direct inward investment should be attracted because of the reduction of uncertainty, and it also keeps interests rates lower, the commitment to low inflation should allow economics to operate with lower costs.
Section 9: Less Developed Countries
LDC means a country whose state of economic development is characterized by a low national income, a high rate of population growth and unemployment, and dependence on commodity exports, in order to make up the shortfall or deficit in balance of payments, these nations must resort to bank loans from private banks and from international credit sources, such as the International Monetary Fund.
As one the feature of that LDC has potential economic powers but still exists gap with developing counties, for example, China as the second greatest economic countries after America, it still a LDC but with the accelerating develop at an amazing speed about 9. 8% per year during last two decades.
As another feature which with a problem of unbalancing economy developing, also can reflect in China, the north-west areas where is fairly remote from cities is still poverty and low production efficiency with the situation of poor life standard, which compares with the people live in cities especially in Beijing and Shanghai, most of them live in a quite rich life.
Section 10: Two current issues of LDC
First, most LDCs start base on the low level of material and technology, it’s very hard to develop follow the step of developed countries. Like China, as for developed countries develop towards high-tech industrialization, and make it dominant then make it generalized, and they already finish the former two, while China is under the situation that merely solve part of the former two and the last one is far away from now. Second, LDSs have less strong economic to support them to develop, which means they are at a disadvantage to absorb foreign funds and technologies.
If LDCs not make a great increase of science technology, the circumstance will get worse and worse. And this situation exactly like China, as China at a low level of wealth of the whole country, the economic power is quite poor to support it competes in the international market.
Section 11: Impacts of multinationals on Newly Industrialized Countries and LDCs
Newly Industrialized Countries are countries between LDC and developed country, they also as known as semi-developed country, such as Latin America, Brazil and Singapore. As the example of Singapore, before the financial crisis in Southeast Asia, Singapore depends on multinationals to solve the issues of short of funds in early development and make effective use of available and potential resources to initial success, while after 2001, as the result of over dependent on multinationals, the economic of Singapore face the huge risks and encounter the most serious economic recession. For LDCs, on one hand, with the entry of multination, it increases the Growth Potential of Nation Economy. As injection of new capital, it is good for a country’s revenue and the reconstruction of invest circumstance.
Such as China, multinationals entry in China recent year as long as keep profits are all contributed to incrassation of China’s economy. On the other hand, when the cross-broader capital recommended, it could be harmful if it belongs to financial dangerous capital, as the reasons of too much hot money, vicious hedge fund. These harmful capitals effect a country’s economic in a bad way, even too serious to lead financial crisis. For example, Vietnam this year encounter a rough challenge of their economic even caused fiscal deficits are all owe to the excess hot money.
Conclusion According to the 11 elements listed above, I believe that the advantages of our nation joining the EU is totally greater than disadvantages, additionally, they will bring more preferential policy and more inflows funds to us which can help us do the free trade in a better way base on my analysis of the UK trend change through the last 30 years. Generally speaking, to join the EU in a way can solve the problems of our nation encounter in the past such as capital shortage, and improve the trade developed towards a higher level.
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