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International Trade and Finance

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International Trade and Finance essay

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Introduction

In this research, we seek to discuss the implications of globalization on developing CARICOM countries. It is believed that with the uprising of globalization, the developing countries within CARICOM would have benefited from it greatly but statistics would have shown otherwise. The tasked at hand is to draw on the theories of international trade and link it with the difficulties that these developing countries are facing.

Globalization

What is Globalization?

According to (Piie, 2016) “Globalization is the word used to describe the growing interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information”.

Developing Countries

A country with little industrial and economic activity and where people generally have low incomes (Cambridge Dictionary, n.d.). This statement has defined the word ‘Developing Countries’. Examples of such countries are the Philippines, Mexico, Argentina and we can say the whole CARICOM countries.

Broadly, globalization has brought with its numerous benefits. It has led to the reduction of transportation and communication cost and the removal of artificial barriers in the exchange of goods, services, capital, and people across borders; ultimately greater integration of world nations. Freeing up the international trade process has helped many developed and developing countries grow faster than otherwise would have done. Statistics point to increased standards of living and extended life expectancy. However, in many parts of the world, globalization also has failed to bring the predicted economic improvements (Stiglitz, 2002).

In research previously done in the ‘LinkedIn’ website. (Hamdi, 2015) claimed the impacts that globalization can be pointed out in three points.

The beneficial side of globalization is the opening of free trade resulting in the increased currency of countries. With the World Bank and International Management intervening, urging developing nations to experience advertise and radical changes through extensive loans. Many developing countries started to find a way to open their business sectors by eliminating taxes and free up their economies.

As a result, developed nations invest resources into developing countries, making openings for work for individuals living in poverty. Even though this is a good thing, it also makes the rich getting richer and the poor poorer. Supporting such findings, the rich may set up companies in developing countries to benefit off the low wages causing unemployment to decrease but does change the fact the cost of living is proportional to such rising.

With the inflow of resources and technology into the developing countries., the health and education systems have been refined. This gives educational institutions access to expand their knowledge in the field they are currently in and others, hence creating more and new occupations in the country. As for the health institutions, this will help to increase the life expectancy in folds depending on the status the developing country is at. Also, globalization assists specialists to discover dangerous diseases, so that the discovery of the appropriate medicine to kill the spread.

Culture Effects- The major physical components of globalization are television; internet radio sets the foundation where we see that culture is traded especially between the US and the remaining continents. For Example, NIKE is American-based company, but in countries all over the world, you can see either, athletes or sports fans be wearing clothes of the brand. Same as for Amazon, most online purchases are from this website due to its accessibility of hard to get products in their countries.

A Drawback of globalization is, globalized competition has forced many minds skilled workers were highly educated and qualified professionals, such as scientists, doctors, engineers, and IT specialists, migrate to developed countries to benefit from the higher wages and greater lifestyle prospects for themselves and their children. This leads to decrease skills Labor in the developing countries.

CARICOM

The Caribbean Community and Common Market (CARICOM) is an economic association formed ten Caribbean nations. The countries that makeup CARICOM are Antigua & Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname and Trinidad and Tobago It is now ‘one of the longest surviving integration movements among developing countries. The original Treaty of Chaguaramas was signed on 4 July 1973, in honor of the birthday of Norman Washington Manley’ (CARICOM, n.d.).

Initiated in 1973, its fundamental purposes are to stimulate economic integration and cooperation among its members, to assure that the benefits of integration are unbiasedly shared, and to coordinate foreign policy. Its utmost activities required coordinating economic policies and development planning; devising and instituting special projects for the less-developed countries within its jurisdiction; operating as a regional single market for many of its members (CARICOM Single Market); and handling regional trade disputes (Meyer, 2015).

Benefits

Countries in CARICOM are eligible to take part in the CARICOM Single Market and Economy (CSME). (Jude, 2012) produced an article of Jamaica’s former Prime Minister Portia Simpson outlining some benefits Jamaica can reap. One in which is the alleviation of job creation and finance, the Caribbean Development Bank (CDB) and the Caribbean Development Fund (CDF) are the financial institution to assist the aid of countries in high inequality. The Caribbean examination council (CXC) and as well as the University of the West Indies have offered to train and produced ‘scholars, leaders, and professionals. And finally, passenger information systems to enhance security and culture. CARIFTA games are one example.

Drawbacks

(MATTHEWS, 2016) On the other hand, disagrees with CARICOM absorbing funds and not facilitate the par value that is funded. It’s have turned out to which person to the progressive countries for financial stability

The impact of global integration on CARICOM has been two-fold, and never a win-win outcome- seeing its share of risks, and continuous challenges due to an evolving environment (education and technology) with few positives to highlight. Alabi (2010) states that the Caribbean’s experience of globalization has largely been negative due to large scale migration, exploitation, and destruction of the area. There is no doubt that globalization has resulted in changes in the structure of production and trade to the CARICOM nations, however, may pose significant concerns to the economies’ sustainable development (ECLAC, 2002).

Despite an acceptance to the global integration process, relatively strong democratic political systems, the high quality of human capital and some natural resources, CARICOM income growth lagged many other developing countries or regions- below the rate needed to reduce poverty and unemployment (Singh, 2004). The region’s entanglement with international capital markets has provided a pathway to enormous opportunities, at the same time amplified the exposure to increased vulnerabilities. Notably, the CARICOM member states are among the most indebted.

Many countries across the CARICOM jurisdiction have incurred significant losses, resulting from slow or zero compliance of the anti-money laundering and other increased financial regulatory rule in the year 2014. This resulted in many being placed onto a non-cooperative list imposed by international institutions. Subsequent labeling as a high-risk destination for financial services has brought additional pressure on the region’s banking system by the region’s largest trade partners and the loss of relationships (Zagaris, Berliner, & Rowe, 2016).

Despite, current and impending challenges, the region remains committed to gain economic strength, improve opportunities and increase educational and technological trade (Worrell, 2010). All CARICOM countries have committed to the international certification process of the Financial Sector Assessment Program (FSAP) and the region has made commitments under the Foreign Account Tax Compliance Act (FATCA). The process of de-risking, which is expected to be costly for the region, but CARICOM stands to improve the developing countries under its jurisdiction.

Theories to relate

There are many theories in international trade that can be looked that that relates to CARICOM countries. The classical theory of international trade is one such theory that was formulated to provide guidance on questions of national policies of a country. It includes descriptive analysis of the economic process; however, it can be used to relate to the selection of phenomena to be scrutinized and problems made with reference to current issues of public interest (Pinnock 2019).

Porter’s Diamond theory can be used to explain the impacts that globalization has on CARICOM. Harvard professor Michael Porter’s model of the five forces on competition has become one of the most established approaches to view competition. It can be used for industry competition in CARICOM or for a company’s place within an industry competition.

With the introduction of the model of the five forces of competition, Porter lifted the view on competition from being focused on the rivalry between competitors in an industry to include a number of other potential competitors: the suppliers through their bargaining power, the buyers of the industry’s products through their bargaining power, the potential threat from new entrants to the industry competition, and finally the threat of substitutes through their potential to take market shares from the industry.

The model thus introduced a new dynamic situation where players from all these forces over time are potential competitors, instead of a previously more static picture focused on the existing rivals.

However, to be able to assess the impact of globalization on the competitive situation in CARICOM, we will also need to address another of Porter’s concepts, namely the value chain.

The value chain offers a view of a company as a set of interlinked activities. Porter argues for the necessity of addressing the strategic choices for the individual activities to gain a competitive advantage. The activities in the model are shown either as sequential, as part of the production process, or as support activities.

It is emphasized that in the evaluation of drivers of globalization the focus is on the ones that are considered to have a significant effect on the competitive situation of companies. Politics and social factors are major forces behind globalization and have led to the reduction of trade barriers and economic reforms, paving the way for economic integration. Stiglitz claimed that politics shaped globalization. In this evaluation, it is considered a predecessor event and omitted.

In evaluating the effects of globalization in CARICOM, it can be useful to separate drivers and effects, though both can affect the competitive situation of a company. The drivers of globalization are the forces that lead towards closer economic integration. Rather than setting up a comprehensive list, the paper focuses on the factors mentioned most in the literature. These can be summarized as:

  • Lower trade barriers
  • Lower transportation costs
  • Lower communication costs
  • Information and communication technology (ICT) development
  • Spread of technology

Porter’s diamond is an economic model developed by Michael Porter that aims to explain why particular industries become competitive locations. There are four elements highlighted in the diamond: factor conditions, demand conditions, firm strategy, structure, and rivalry, and related and supporting industries. There are two other elements that sit outside of the diamond and influence the four factors. These are Chance and Government Policy.

Factor conditions are human resources, physical resources, knowledge resources, capital resources, and infrastructure. Demand conditions can help companies to innovate faster and to create more advanced products than those of competitors. Related and supporting industries can produce inputs that are important for innovation and provide cost-effective inputs. Firm strategy, structure, and rivalry create pressure to innovate in order to upgrade competitiveness.

Government interventions the supply conditions of key production factors, demand conditions in the home market, and competition between firms. Chance events are important because they create discontinuities in which some gain competitive positions, and some lose. Using Porter’s Diamond, you should be able to gain a better understanding of exactly how your home nation impacts what you can do as a company both today and in the future.

[bookmark: _Toc773798]The comparative advantage theory was first developed in the 19th-century by a British economist named David Ricardo. This theory identified the cause and benefits of international trade to the differences in the relative opportunity costs of producing the same commodities among countries. This theory is based on the labor theory of value, in which labor is the only factor of production. The fact that one country could produce goods more efficiently than another country was not an argument against international trade (Amadeo 2018).

An example involves two countries (Jamaica and Trinidad) with two goods, if Jamaica must give up three units of good x for every unit of goody produced, and Trinidad must give up only two units of good x for every unit of goody produced, both countries would benefit if Trinidad specialized in the production of y and Jamaica specialized in the production of x. Trinidad could then exchange one unit of y for between two and three units of x, and Jamaica could receive between one-third and one-half units of y for every unit of x. The downside to this theory is that Trinidad may be less efficient than Jamaica in the production of both commodities (Pinnock 2019).

The comparative advantage theory is in strong support of free trade and specialization among CARICOM and other countries. However, the issue of comparative advantage may become much more complex as the theory simplifying assumptions, such as a single factor of production, a given stock of resources, full employment and a balanced exchange of goods are replaced by more realistic procedures. Comparative advantage theory is when a country produces a good or service for a lower opportunity cost than other competing countries. A country with a comparative advantage makes a trade-off worth it, this means that there are more benefits of buying a good or service from such a country than disadvantages.

A country that practice comparative advantage may not be the best at producing the item, but the advantages are good for other countries to import. This is because goods or services have low opportunity costs. An example is, oil-producing countries have a comparative advantage in chemicals. This means that locally-produced oil provides a cheap source of material for chemicals when compared to countries without it. A lot of the raw ingredients are produced in the oil distillery process which causes chemicals to be inexpensive, making opportunity cost low. Countries such as Saudi Arabia and Mexico are competitive with U.S. chemical production firms.

Based on research conducted by Lewis-Bynoe and Webster (2000), it can be said that CARICOM is not a homogeneous entity in terms of comparative advantage and international trade. There are dissimilarities in the pattern of export specialization of some member state but there are some strong common elements of the Caribbean trade patterns. There are levels of competitiveness among CARICOM members which lead to the consideration to formulate/initiate the CSM&E. The Caribbean single market and economy (CSME) is an initiative that is explored by CAROM which is aimed at integrating all member states into a single economic unit like the of the UN.

This would eliminate all tariff barriers within the region, creating free trade. It is hoped that such an economic unification would resolve several issues faced by small developing CARICOM economies who find it difficult to compete with larger international competitors on a global market. This implies a strong possibility for some trade creation resulting from this CARICOM agreement. The overlap in specialization upon CARICOM nations are relatively low, which may have resulted from limited opportunities for the countries involved.

The product life-cycle is a theory that was developed by Raymond Vernon in the mid-1960s. This theory outlines the reasons why many new products, in the twentieth century were developed by US firms or other developed countries and sold first in the US market. According to Vernon, all products go through a continuum or cycle that consists of introduction, growth, maturity, and decline stages. It is observed that the location of production may shift to serve markets according to the stage of the cycle a product is therein. One of the most remarkable developments in international trade in the past thirty years has been the globalization of the production of differentiated manufactured goods.

Differentiated manufacturing is defined as goods that emerged as a result of inventions such as electricity or computer-related technology. Differentiated goods are often developed by advanced industrialized countries. When the trade liberalization, policy changed in the developing countries along with technological advancement in telecommunications, led to the transfer of production of some differentiated goods to the developing countries because the cost for labor is much lower than in developed countries. The transfer of production of differentiated goods from the developed to developing countries is called globalization of production. This s where the CARICOM countries benefit especially though telecommunications such as call centers. These companies set up business in the Caribbean because the cost of labor is very low.

According to Vernon, new products are usually developed in the most advanced countries (such as the U.S. in the 1960s). In early days, production would be located where the product is developed, to allow efficient feedback between R&D and production. When the production design, process, and inputs become sufficiently standardized, the technology usually transferred to lower-wage countries.

If we apply this theory to the technologically developed economies such as the U.S. and the developing economies such as CARICOM countries, there would be a better understanding on the increased participation of these countries in the globalization of production affects growth, labor income distribution between the developed countries and developing countries and living standard of workers in these regions. It is observed the technology and lifestyle is adopted from developed countries to CARICOM nations.

The Global Strategic Rivalry Theory of international trade was developed in the 1980s by economists Paul Krugman and Kevin Lancaster to “examine the impact on trade flows arising from the global strategic rivalry between Multi-National Corporations” (MBA Knowledge Base, 2018). This theory explores the notion that for firms to stay viable, they should exploit their competitive advantage globally and try to keep it sustainable. According to this view, firms worldwide struggle to develop some sustainable competitive advantage which they can then exploit to dominate the global marketplace. It focuses on strategic decisions that firms adopt as they compete internationally. These decisions affect both international trade and international investment.

For Caribbean countries, the impact of globalization on trade has been reflected in increased liberalization and market-opening policies, especially during the latter part of the 1980s and the 1990s. Influenced by the shift in policies at the global level, Caribbean countries responded with a package of policies steered towards limiting the role of the State in the economy and reinvigorating stagnant production systems, which were reoriented towards export markets.

The reduction of trade barriers and the increasing openness of these economies have not led to a significant increase in intraregional trade or helped them to gain a growing share of the extra-regional export market; as a result, these countries’ growth potential has been limited. Caribbean economies lack complementary trade-product to have intraregional trade and have not substantially changed how their exports are composed. In fact, they are dependent on preferential market access schemes granted by developed countries. Additionally, Caribbean economies are characterized by differences in per capita income and stage of development that are hard to reconcile with deeper integration schemes.

Globalization has both fostered and brought to light a process of sectoral change in the composition of output in favor of the services sector, to the detriment of agriculture and manufacturing. This process accentuates the differences between Caribbean economies by creating a dual pattern of specialization so that the countries are divided between service-based and goods-producing economies.

It also sheds light on the dependence and vulnerability of these economies. While export growth has been subject to the viscosity of the agricultural and manufacturing sectors, import growth driven mostly by consumer goods has not receded. Therefore, a need to attract foreign capital was created to further stimulate the growth and development of sectors that have been successful under globalization. Trends in employment and migration have mimicked these changes in output and capital flows. In most countries, macroeconomic policy has been driven towards maintaining macroeconomic stability by adhering to pegged or fixed exchange-rate regimes. The result is that inflation has been lowered to single-digit levels.

In small open economies such as the Caribbean, which are constrained by their external sector, fiscal and monetary policy control absorption, which is the main adjustment lever. This strategy precludes the use of countercyclical fiscal policies. This may eventually give rise to a tendency towards low growth levels and hinder the achievement of a full-employment potential level of output.

The importance of the trade and trade competitiveness to the region cannot be overstated, yet, the sector continues to underperform. It is shown that the CARICOM is falling behind in its many efforts to compete in the globalized market place; key underlying factors of competitiveness – productivity and innovation- need greater attention. Thus, a boundary-less evaluation and reallocation of resources to the most effective areas of production is required with utmost urgency, if the region is to gain any form of competitive advantage in the global market.

A noted recommendation stated by Harker (Harker, 2010) was that the difficulties being experienced by CARICOM require a solution aimed at increasing production and exports. Given the drawbacks related to a small size, the author was pushing an agenda of improved competitiveness. (Antonio Alleyne et al. 2015) However, the phase of globalization has altered the nature of competitiveness for economies (Hatzichronoglou, 1996). Therefore, a first step will be to understand the nature of globalization and the associated benefits or costs; before appropriate strategies can be developed. Leaders of this region may have missed or lacked the 6 full understanding of the globalization process as it relates to developing countries, especially small countries- e.g. CARICOM.

In Caribbean countries, the impact of globalization on trade and investment has been reflected in increased liberalization and market-opening policies; trade has now exceeded 100% of GDP for most counties, and cross border investment activity has increased. The process has brought with increased competition and challenges to the effectiveness of policy; making it imperative for businesses and governments to always adapt if they are to survive in a more efficient environment. Singh (2004), noted that the region can take pride in its current level of integration into the larger world economy.

Aided by technological advances, the region’s tourist industry has stood out, reducing dependence on primary low valued commodities for trade. The region continues to be recognized as a destination for investment, both onshore and offshore. Exporting highly skilled labor to industrial countries, with the return on investment seen in the form remittances have helped raise incomes and living standards of the ones left behind. Being the world’s largest recipient of remittances as a percent of GDP, many of the region’s countries have lost more than 70 percent of their tertiary-educated labor force—among the highest emigration rates in the world (Mishra, 2006).

However, the net gains from the exportation of knowledge resources for the current levels of remittances have yet to be quantified. The impact of global integration on CARICOM has been two-fold, and never a win-win outcome- seeing its share of risks, and continuous challenges due to an environment which is constantly evolving with few positives to display. According to Alabi (2010), the Caribbean’s experience of globalization has largely been on the negative side due to large scale migration, exploitation, and destruction of the area. Undoubtedly, globalization has resulted in changes in the structure of production and trade to the CARICOM nations, however, may pose significant concerns to the economies’ sustainable development (ECLAC, 2002).

Special attention must be given to the use of natural resources, the expansion of human settlements and the development of poverty-alleviating and income policies, which are among the greater sustainable development issues confronting the Caribbean countries. Despite an acceptance to the global integration process, relatively strong democratic political systems, the high quality of human capital and some natural resources, CARICOM income growth lagged many other developing countries or regions- below the rate needed to reduce poverty and unemployment (Singh, 2004).

The region’s entanglement with international capital markets has provided a pathway to enormous opportunities, at the same time amplified the exposure to increased vulnerabilities. Notably, the CARICOM member states are among the most indebted. While having one the more developed financial services sector and a larger base of resources, Jamaica was ranked 4th among the countries with the highest relative public debt in the world for 2015.

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