1. Free Trade - The movement of goods and services among nations without political or economic barriers which in the simpler terms, to do away with the protectionist policies that have been adopted by the government. The concept of Globalization - The global economic integration of many national economies into one global economy - To globalize means to develop business, society, etc. so as to make international influence or action possible - Global trade enables countries to produce what they can and buy the rest in a mutually beneficial exchange relationship - This happens through the process of free trade - trade without imposing restrictions Trade liberation - Loosening or removal of restrictions on trade - Market liberalization initiatives which are; free trade areas (FTAs) - Bilateral, Regional e.g. ASEAN, NAFTA and EU and WTO (whole world) - 160 member countries.
1.1. Why do we need to liberalize trade? - To support globalization - the global economic integration of many economies into one global economy - To globalize means to develop business, society, etc. so as to make international influence or action possible - Global trade enables countries to produce what they can and buy the rest in a mutually beneficial exchange relationship - This happens through the process of free trade - trade without imposing restriction Why do we need to globalize in the first place? - Economists believe that the world will be able to enjoy greater levels of output and higher standards of living - Free trade promotes competition - Consequently, resources are efficiently allocated and mobilized to the places that can best produce goods and services at the lowest cost - Consumers will have wider choice of goods and services and enjoy lower prices.
2. Fundamentals of International Trade
2.1. International trade refers to transactions made between countries including the exchange of goods and services, financial flows and factor movements. Simply put, it is the export and import of goods and services among nations. Basis of international trade - no single nation can produce all the goods and services that are needed by the society.
2.2. Advantages of International Trade - Increase in the country's total output. - Promotes aggressive competition among businesses, resulting in lower prices of goods and services. - Greater variety of goods and services for consumers to choose from. - Increases efficiency in local production methods to compete with the quality of imported products - Allows businesses to reap the economics of scale. - Enables countries to produce what they can and buy the rest from trading partners in a mutually beneficial exchange.
2.3. Absolute advantage The advantages that exist when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. This nation has pure monopoly in production of that particular product. Comparative advantage A country should sell to other countries those products that it produces efficiently and should buy from other countries those products that it cannot produce as efficiently - The theory of Comparative Advantage propounded by David Ricardo in the late 18th century stated.
2.4. Measuring International Trade Balance of trade The ratio of total value of exports to imports. Balance of payments The difference between money coming into the country and money leaving the country over a specified period of time. Malaysia's balance of payments is divided into two major accounts which are; current or goods and services account and capital and financial account.
3. Limitations of International Trade and Protectionism
3.1. Disadvantages 1. The danger of economic specialization 2. Economic and political interdependence among trading partners
3.2. Trade protectionism; Government policies implemented to restrict foreign competition from affecting local industries.
3.2.1. Tariffs; These are taxes or customs duties on imported goods which is usually levied to generate government revenue for public expenditure.
3.2.2. Quotas; These are limits imposed on the number or amount of goods that are allowed to enter the country
3.2.3. Embargoes; In its most extreme form, a quota becomes an embargo, i.e. a total ban is set on the goods that are not allowed to be imported into the country.
3.2.4. Subsidies and grants; This policy enables these producers to offer lower prices to customers in competing with foreign products
3.2.5. Restrictive import standards and licenses; Imported stuffs have to go through special health and safety tests before entering the market
3.2.6. Preferential treatment; It comes in the form of tariff exemptions, etc. duty given to member nation only.
3.3. Reasons of nations adopt protectionist policies - To protect industries in infancy - To diversify the economy - To correct a temporary unfavorable balance of payment position - To protect declining industries - To prevent dumping
4. Free Trade. Globalization and Trade Liberalization
4.1. Trading blocks Organizations of nations that remove trade barriers among member nations to promote free trade among them. It will limit the foreign competition since member nations cooperate among themselves to promote mutual trading benefits.
4.1.1. Four most powerful trading blocks; The European Union (EU), The North American Free Trade Agreement (NAFTA), The Association of South East Asian Nations (ASEAN) and South America's Mercosur
4.2. World Trade Organization (WTO) - formed on 1 January 1995 - A membership of 124 nations it replaced General Agreement on Tariffs and Trade (GATT)
4.2.1. Objective; - To reduce trade barriers - To eliminate discrimination in international trade - To prevent the establishment of further trade barriers - To consult one another for unilateral benefits.
4.2.2. Goal To help producers of goods and services, exporters and importers conduct their business
4.2.3. Main function To ensure that trade flows as smoothly, predictably and freely as possible to facilitate globalization
4.2.4. Agreements are legally binding Negotiated and agreed on by members
5. Penetrating Competitive Global Market
5.1. Global market
5.1.1. Licensing
5.1.2. Franchising
5.1.3. Strategic alliance
5.1.4. Joint ventures
5.1.5. Foreign direct investment
5.1.6. Importing and exporting
6. Malaysia and Its External Trade
6.1. - One of the world's 20 largest trading nations - According to AT Kearney/Foreign Policy Globalization index, Malaysia is ranked as the 19th most globalized nation in the world - The World Bank has ranked Malaysia as the 18th nation in term of ease of doing business - It reflects Malaysia's open policy to international trade and the importance of international trade to Malaysian economy. - Malaysia has sustained a positive trade balance since 2000 (the beginning of millennium) when global free trade was promoted through the WTO - The February 2011 Malaysia External Statistics Report stated that Malaysia has consistently recorded a positive trade surplus since 1997.
6.2. Major Exports of Malaysia, 2007 - Electrical and electronis goods - Palm oil and palm oil-based products - Crude petroleum - Liquefied natural gas - Timber and timber-based products - Petroleum products
6.2.1. Three major imports; intermediate goods, capital goods and consumption goods.
6.3. Malaysia's top five trading partners in 2007 - The United States of America - The Republic of Singapore - The European Union - Japan - The People's Republic of China
6.3.1. Malaysia's trading partners Jan-Oct 2014 - The Republic of Singapore - The People's Republic of China - Japan - The European Union - The United States of America - Thailand - The Republic of Korea - Taiwan - Australia
6.3.2. Malaysia's trade performance, Jan-Oct 2014 - Trade has remained resilient with buoyant export growth and a turnaround in net exports - Despite an ever-challenging global trading environment, Malasyian exports expanded by 7.3% to RM 634.8 billion - Total trade was RM1.207 trillion, an increased of 6.6% from the corresponding period of 2013
7. Malaysia's Market Liberalization Status and Globalization
7.1. - Malaysia has been very supportive in promoting global trade - Being a member of ASEAN, free trade agreements (FTAs) have been jointly negotiated with China, Japan, the Republic of Korea, India, Australia and New Zealand - Bilateral free trade agreements have been concluded between Malaysia and Japan, Pakistan, Chile and New Zealand - Malsyia has also negotiated other trading agreements to facilitate global trade, including TPS-OIC, PTA among D8 and GSTP - After negotiations in 2011, Malaysia has successfully aigned FTAs with Turkey, India, the United States of America. Australia and the European Union.
7.1.1. - Through ASEAN Economic Community (AEC), there will be a single market and production base with free flow of goods and services, investments, skilled labour and freer flow of capital - In 2014, trade performance records showed that ASEAN nations have significantly supported growth in Malsyian exports, followed by the EU, Hong Kong, India, Australia, US, Taiwan and Japan. - As a member of the WTO, Malsyia continues to liberalize its international trade in support of globalization - Global trade has so far benfited Malsyia, as seen by the overall positive balane of trade and overall balance of payments since 2006. - Many local companies are expending their business into the global markets to tap the huge potential, especially in ASEAN and China - Globalization and free trade has created a positive impact on the Malaysian economy - Global trade will certainly continue to be a common feature of the Malaysian economic scenario.