Introduction
International trade is described as the exchange of services and goods between different countries. Countries engage in trade because they are endowed with different natural, capital, and human resources. Some countries may have the requisite resources, but may not have the capacity to produce or manufacture some goods or deliver some services. Most economists agree that the decision to commence the production of goods and services has an inherent opportunity cost. In international trade, it is acknowledged that the countries that produce goods with low opportunity costs perform better in trade. Such countries can afford to specialise in the manufacturing of some goods. The surplus can then be used in trade with those countries that may not have the resources to produce the goods or whose opportunity cost may be uneconomical. Trade takes place when individuals and countries specialise in the production of the product with the least opportunity cost. Economists also agree with the assumption that trade makes the production and consumption of goods and services to increase among the trading countries.
There are several gains associated with international trade. One of them is the ability to buy goods at a lower price than what is available in the local market. Consequently, consumers access less expensive goods, while the producers are able to access cheap raw materials. In some cases, the producers have access to semi-processed goods. Ideally, this is the major factor that leads individuals and countries to engage in trade (Anderson, 2004). The prices of some goods may differ from one country to the other because of the differences regarding access to natural resources, quality of labour force, level of technology, and the quality of investment. The ability to offer low prices in the market is largely determined by the comparative advantage (Anderson, 2004).
Another reason why countries engage in trade is the opportunity to offer the consumers greater choices of the goods and services available. The consuming public benefits from access to both domestic and international products from different countries. The difference in resource distribution is another reason behind the desire to engage in trade. For instance, there are resources that one country needs in order to produce certain goods, but the resources are not locally available. In such a case, the country has to import the necessary resources from the countries that are endowed with those resources (World Bank, 2016). The mechanics involved calls for such a country to export some of its products in order to access foreign currency to facilitate the import of the required resources.
While the United States of America is endowed with natural resources, Singapore has little natural resources and depends on trading for economic growth. Singapore imports all of its production resources; however, the country is a net exporter of manufactured goods and is, therefore, able to fund its imports (USDA, 2016).
The objective of this paper is to explore the concept of international trade through the comparison of two different countries. The countries chosen are the United States of America, a country well endowed with natural resources and Singapore, a country that has to import close to all of its natural resource requirements. The comparison will be based on the trade of manufactured products and agricultural produce. The discussion is going to be anchored on several economic theories and concepts that relate to the production of goods and trade.
The paper first discusses the trade structures of the United States of America and Singapore. There is an exploration of the theories that support the study and practice of international trade with a focus on the United States of America and Singapore. Within the discussion of the theories, there are tables to reinforce the production and trade practices between the two countries that form the case study. Finally, the paper offers a conclusion that highlights the main points that have been raised in the discussion.
Trade Structure of the United States of America and Singapore
United States of America
The expansion of regional and global trade was anchored on trade liberalisation. The bilateral and multilateral liberalisation that emerged in the 1950s has led to the significant lowering of trade barriers in the developed economies, and followed in the recent past, by the developing nations (Anderson, 2004). The breaking down of trade barriers and the decrease in the cost of trade driven by the reduction of communication and transport costs helped in the fragmentation of stages of production beyond national borders (Anderson, 2004). The fragmentation allowed the supply chain to extend beyond the region to become a global affair. Alongside the low trade barriers was the technological innovations that have helped lower the communication cost that has enabled trade to be transacted at greater speed.
The United States of America structure of trade is characterised by the growing share of higher technology products. It is one of the most technologically advanced countries in the world. The contribution of the innovative technology in exports for goods such as communication, machinery, and transportation equipment has been on the increase while the goods with low technology such as textile have experienced a decline. The technological intensive export structures offer solid prospects for economic development (Wong & Ding, 2016). It appears that the future of the American economy is on the technological front.
Economists opine that trade liberalisation has significantly benefited the United States of America; nevertheless, there is no consensus on its precise effects. Some economic observers have claimed that the gains derived from trade liberalisation are likely to be more dispersed than any losses that may be associated with the liberalisation. Nevertheless, the economy-wide benefits are positive even after accounting for the cost of adjustment to the free market. The impacts of the free market on international trade need to be taken into consideration (Zhang, 2010).
The United States of America trade structure has been changing in the last few decades. These changes are a reflection of the changes that the United States of America economic structure has been undergoing. The relative shares of the economic output viewed through the major economic activities, including services, manufacturing, and agriculture, are constantly changing. In the last century, the trend was a decline in agricultural production accompanied by the rise in manufacturing (Anderson, 2004). In the last few decades, the trend has been a decline in manufacturing but with a corresponding rise in high technology. These changes are the inevitable result of a capitalist economy (Anderson, 2004).
The changes have prompted many United States organisations to close down manufacturing units in the country. The entities have opted to shift the operation to developing countries. The companies are able to take advantage of low wages and manufacturing skills (Anderson, 2004).
Singapore
The Singapore economy has become more service-oriented in the last few decades. The international trade in services has expanded rapidly and has diversified the types of services traded. The country is reputed as being one of the most open economies in the world. The country trade, both import and export, is approximated at 350 percent of the GDP (Wong & Ding, 2016). Singapore, therefore, is an important trading port. The economy is associated with the penetration of most of the regional supply chains resulting in the creation of trade in the intermediate products.
The economic and trade structures reflect Singapore high export orientation. The country net export had declined from a high of 30.8 % of the GDP before the financial crisis that affected the global economy to 24.4% in 2014 (Wong & Ding, 2016). Nevertheless, the country has one of the highest exports to GDP ratios in the world. The export orientation is also reflected at the manufacturing level. Approximately 70% of the manufacturing industries, which produce 67% of total production are export-oriented (Wong & Ding, 2016). Conversely, the production of goods is highly dependent on imports. The most import-intensive resource is the petroleum product industry.
Singapore export trade is dominated by machinery, mechanical, electrical appliances as well as oils and fuels. The country has also registered significant growth in plastic, medical, and surgical instruments (Wong & Ding, 2016).
Table 1: Basic economic indicators and trade structure of The United States and Singapore in 2014. Source: USDA. (2016). Crop production 2015 summary.
Absolute Advantage and Comparative Advantage
Absolute Advantage
In economics, the concept of absolute advantage often refers to the ability an individual, a company, or a country, has to produce a higher quantity of a product or service than competing entities, utilising the equal amount of resources. Adam Smith gave the first description of the theory of absolute advantage in the realm of trade (Negishi, 2013). According to the scholar, labour is the only significant input. Thus, absolute advantage can be determined by the simple comparison of the productiveness of labour. For instance, two economies specialise in the production of goods which have an absolute advantage. Then they exchange some of the goods. Both countries will end up with more of the goods (Zhang, 2010). Such an eventuality could not happen without trade. Without the exchange of trade, each country would produce just enough for local consumption.
The principle of absolute advantage can be illustrated using the United States of America and Singapore. For example, the two countries produce two products using labour as the standard input. It is also assumed that all the workers are equally productive in the United States and Singapore. The production technology may be different in the two countries. Whereas Singapore may require two units of labour to produce a unit of wheat, the United States requires one unit of labour because it has developed high technology in agriculture. It means, therefore, that the United States of America is efficient in the production of wheat, and, therefore, has absolute advantage. Singapore, similarly, Singapore can produce an electronic appliance by using only one unit of labour while the United States needs two units of labour to produce one unit of an electronic appliance. Singapore appears to have a greater absolute advantage in producing the electrical appliance. In the circumstance, the United States will export food products to Singapore. Singapore, on the other hand, will export electrical appliances to America (Wal-Mart, n.d).
Table 2: Production: Five selected agricultural products of The United States and Singapore in 2014. Source: USDA. (2016). Crop production 2015 summary.
Analysis of Comparative Advantage of the United States and Singapore
In economics, the principle of comparative advantage is viewed as the ability of individual, an organisation, or a country to manufacture some products at low marginal cost than another entity (Zhang, 2010). The concept is in contrast with the absolute advantage, which is taken to the ability of an entity to manufacture a product at a low absolute cost in comparison to other entities. Comparative advantage is concerned with how trade can imbue value for all entities even when one entity can produce all the products with less resource. The benefits of such an upshot are known as gains from trade.
Table 3: Producer price: Five selected products of The United States and Singapore in 2014. Source: Wal-Mart. (n.d). Cookware.
Factor Endowment, Trade, and Income Distribution
Hecksher-Ohlin (H-O) Model
The Heckscher–Ohlin model is taken as a mathematical model that is applied in international trade. It was developed by Heckscher and Ohlin who were based at the Stockholm School of Economics (Faccarello & Kurz, 2016). The model is an improvement of David Ricardo’s concept of comparative advantage. The model aims at predicting the patterns that obtain in commerce and production. It is anchored on the dynamics of the endowments of a trading country of geographical region. The model premise suggests that economies often export goods that utilise the abundance of the cheap natural resources while importing goods that are likely to use the economy’s scarce factor (Faccarello & Kurz, 2016).
The model suggests that traded products are made of sets of factors such as capital, labour, and land. Thus, the international exchange of goods is a kind of indirect arbitrage of the factors of production. The arbitrage obtains in the transfer of various factors of production from countries where the factors are in plenty to locations of scarcity (Faccarello & Kurz, 2016). The theory also suggests that in some circumstances, the arbitrage can also eliminate the overriding factor-price differences. The overarching implication of the model is the suggestion that the option of selling the factor services to another country, arrived at through the exchange of goods, changes a local market to an active global market.
The model can be applied in the trade relationship that exists between the United States of America and Singapore. The two countries trade relationship seems to operate at the realms suggested by the Heckscher–Ohlin model (Shenkar & Luo, 2008). The products from the United States of America can be viewed as a transfer of the production factors to Singapore, a country that is geographically removed from the United States of America. The products imported from the United States, which are mostly agricultural products fits in the domain of the theory. The arbitrage offers the factors of production to Singapore, a country that has limited factors of agricultural production. Singapore, on the other hand, transfers the factors of production for apparel or electronic products that it is able to manufacture cheaply to the United States of America.
Additionally, the model suggests that, unlike the Ricardo model, the engagement in trade often causes a redistribution of the income between the capital and labour. Consequently, complete specialisation of production may not be likely (Shenkar & Luo, 2008). The theory also posits that a country is likely to trade with the goods that exploit its abundant resources extensively. For instance, the United States of America has an abundance of land; as a result, it is a major exporter of agricultural products. The country has also highly skilled workers and an abundance of capital. As a consequence, the United States of America exports innovative and sophisticated manufactured products and services.
Table 4: Factor endowment and pattern of trade of The United States and Singapore in 2014. Source: International Monetary Fund. (2016). World economic and financial surveys: World economic outlook database.
Stolper-Samuelson (S-S) Model
The Stolper–Samuelson concept is embedded within the Heckscher–Ohlin trade principle. The concept is used to describe the existing relationship between prices of output and factors rewards or the wages and possible returns to capital (Shenkar & Luo, 2008). The concept states that, under some economic assumptions, such as the constant scale, equality of factors, and competition, an increase in the price of a product will often lead to an increase in the return of the factor that has a greater production contribution.
The theory was first introduced by Stolper and Samuelson (Negishi, 2013). The theory dwells on a simple framework that carries several assumptions. The concept assumes that an economy can only consist of two sectors. It also assumes that production is achieved by only the labour and capital factors. Subsequent theoretical examinations have shown that the essential features of concept hold more generally. Suffice to say, the Stolper-Samuelson theory can be explained as follows. It is supposed that one country produces products for export while another manufactures goods that have a direct competition with imports. Additionally, the sector that is competing with the imports is labour-intensive. The suggestion here is that the labour to capital ratio is high than what is available in the exporting country. The question is what would be the effect of some change that could raise the relative price such as taxation (Negishi, 2013).
So long as the economy is saturated with both factors of production, the expansion of the domestic product would be at the expense of the exporting country. The concept observes that the expansion of the labour-intensive country and the consequent contraction of the capital-intensive country raise the need for labour in relation to capital. The demand would then put pressure on the workers remuneration. If there is no change in the price of the export goods, the raised wage implies a reduction in the possible return to capital (Negishi, 2013). The result is more increase in the wage to a level that is higher than the import prices. Suffice to say, when the products that compete with imports in the domestic market are labour-intensive, the workers gain and capital looses. Thus, the theorem holds true in the United State of America and Singapore.
Context of New Trade Theories
Economies of Scale
Economies of scale are used to analyse the cost advantages that enterprises obtain due to their size, output, and scale of operation. The cost per unit of the output decrease with increased scale as the fixed costs are broadened over the increased units of output (Faccarello & Kurz, 2016). Often, the operational competencies increase with enhanced scale. The enhanced scales lead to the decrease in the variable cost. The Economies of scale theory can be applied to a variety of enterprises and business activities at various levels. For instance, the concept can be applied in a manufacturing unit, factory, or an organisation. For example, a large manufacturing organisation can carry a lower cost per unit produced than a smaller entity. All other factors should remain equal. An organisation endowed with many facilities is expected to have a reasonable cost advantage over the competitors with fewer facilities (Faccarello & Kurz, 2016).
There are two types of economies of scale. They are the internal and external economies. The internal economies of scale are associated with an organisation increasing its production capacity. The external economies are related to elements that obtain outside of the organisation such as an improvement or in some cases, deterioration, of the organisation operating environment. Often, the external economies of scale may be influenced by the activities of other competing enterprises within or without the same industry (Faccarello & Kurz, 2016). It is acknowledged that the internal economies of scale are associated only to the operations of the organisation. It is assumed that the internal economies of scale impacts on the long-run cost curve. The external economies of scale impact on the position of the curve.
Internal economies of scale
The economies of scale can be delineated through labour and technology. The division of labour is a key element in the economies of scale. Essentially, division of labour mean that larger output rends itself to division of labour (Negishi, 2013). The division of labour reduces cost through increased specialisation which also contributes to the saving of time. In a manufacturing concern, time is lost when shifting from an operation to another. The division of labour also contributes to the provision of conditions that allow inventions of more technology (Faccarello & Kurz, 2016).
Within the economies provided by the division of labour there arises a subset which is referred to as cumulative volume economies. The cumulative volume economies suggest that the technical personnel involved with the production acquires significant skills and experience from handling large-scale production (Negishi, 2013). The cumulative volume skills and experience contributes to the higher productivity and consequently reduces costs.
The technical economies of scale are associated with the fixed capital including equipment and machinery. Such economies obtain because of specialised equipment or technology (Negishi, 2013). The specialisation of the production methods advances in tandem with the output scales increases. It, therefore, leads to the specialisation of the capital equipment and as a consequence, the variable costs are reduced.
The external economies
The external economies can also contribute to the reduction of the production costs. For instance, as the industry expands, it attracts certain specialised enterprises. Such enterprises may include the use of the industry by-products. Such enterprises use the by-products as raw materials to make other products. Similarly, as the industry expands, there arise some specialised companies that provide tools and raw materials to the organisation (Faccarello & Kurz, 2016). Consequently, an organisation accrues benefits from growth. The benefits are often external in the sense that the economies of scale arise not because the organisation has made any effort but accrue out of the expansion of the industry (Faccarello & Kurz, 2016). The benefits of the economies are that they contribute in the reduction of the production costs.
The United States of America exploits the economies of scale in its agricultural production. The agricultural sector has access to vast scales of land. The large scale farming allows for the exploitation of the land as a production factor. The large scale farming also allows for the practice of mechanised farming. The two main production factors in agriculture allow the exploitation of the economies of scale. And, therefore, the production of the agricultural produce is achieved with lower costs (Anderson, 2004). It is could also be the same thing in the manufacturing industry, however, the cost of labour in the United States is high and, therefore, increases the cost of production compared to other nations like Singapore and China.
Singapore, on the other hand, is an export oriented nation. The cost of labour is low and when it is combined with innovative technology the end result is a manufacturing economy that delivers products with low production cost (Wong & Ding, 2016). The country uses the economy of scale in the supply of labour and innovative production technology. Singapore, therefore, can afford to make products that are competitive in the global market while the United States of America can produce farm products that are competitive in the global agricultural produce market.
Table 5: Domestic consumption and export: five selected agricultural products of The United States and Singapore in 2014. Source: USDA. (2016). Crop production 2015 summary.
Imperfect Competition and Market Power
Imperfect competition is viewed as a competitive market situation with many suppliers, however, the sellers they are dealing with heterogeneous or dissimilar merchandise as opposed to the scenario in a perfect competitive market. Thus, competitive markets are generally imperfect in nature (Negishi, 2013).
Imperfect competition can be described as the real world of competition. Today, many multinational industries exploit the concept in order to make surplus profits. In the market scenario, the supplier enjoys the ability to influence the prices with the hope of earning more profits (Faccarello & Kurz, 2016). When an organisation enjoys a monopoly by selling a unique type of service or goods, then it can raise the price of the commodity to increase its profit. Nevertheless, the High profits naturally attract other companies who will come to compete for that profit and the market share (Chang & Katayama, 2012).
In imperfect markets, the economic profit is more prevalent than in perfect markets. Perfect markets or perfect competition is a scenario where there are many suppliers and many buyers. In such a scenario, economic profit is said to be lacking in the long run equilibrium (Chang & Katayama, 2012). If there were any economic profit, new firms would find the profit as an incentive to enter in the industry because there are no barriers to entry. Many organisations would continue to enter the industry until any reasonable profit is exhausted. As the organisations enter the market, they inflate the supply of available goods in the market.
The new entrants have to enter the market through the reduction of prices (Anderson, 2004). The reduced prices are meant to entice the consumers to purchase the new products as the companies compete for customers. The old enterprises risk losing their customer bases to the new entrants. The older enterprises are, therefore, forced to also reduce their prices in order to retain their customers. In the perfect competition scenario, new companies will continue to enter the market until the price of the goods match the average cost of production (Anderson, 2004). The economic profit would be non-existent. With no incentive for new entrants, the supply of the goods to the market stop growing and the price stabilises in equilibrium (World Bank, 2016).
Many economists view the long-run equilibrium associated with the uncompetitive industries as a monopoly. A company that introduces some differentiated goods would initially enjoy some form of temporary market power. The company, at the initial stage, sets the price of the product at a high level. The availability of the goods is limited. As the profitability of the goods gets established, the numbers of the enterprises that want to enter the market often increase until the market gets saturated (Chang & Katayama, 2012). The net result is that the prices start shrinking to match the average cost of production. The monopolistic profit that was associated with the production of the goods disappears. The initial enterprises that had the monopoly get reduced to competitive enterprises. In a contestable market, the cycle is completed with the disappearance of the entrants who were attracted by the economic profit (Chang & Katayama, 2012). Such an eventuality often returns the industry to the previous state characterised by low prices without any economic profit for the firms that are left in the market.
In the imperfect or uncompetitive markets, the profit is more prevalent especially in perfect monopoly. In an imperfect competition scenario, individual enterprises have some control and market power (World Bank, 2016). Nevertheless, monopolists are often constrained by the demands of the consumers. Nevertheless, the monopoly ends up setting a higher price than would obtain in competitive industry. Such pricing allows the enterprise to earn the economic profit in the short and long run.
In the comparison between the United States of America and Singapore, the issue of imperfect competition is a moot subject. Whereas Singapore may not have organisations that have monopolistic tendencies on the world stage, the United States of America has several in agriculture. The United States of America practices imperfect trade in wheat. Nevertheless, in the globalised world market, it is difficult to have a monopoly without some form of competition (Anderson, 2004). Suffice to say, the imperfect competition that obtains in the American agriculture sector is anchored on the government subsidies that offer unfair competition to other agriculturally endowed countries.
Table 6: One selected agricultural product in 2014. Source: USDA. (2016). Crop production 2015 summary.
Conclusion
To sum up, it has been observed that the International trade can be described as the exchange of products and services between different countries in the world. Specifically, many Countries will engage in trade because different countries are endowed and have an abundance of natural, capital, and human resources. In some cases, some countries may have the resources but may not have the capacity of producing or manufacturing some goods or delivering some services. As such, they may require accessing such goods and services from other nations around the world. Most economists opine that the decision to engage in the production of goods or services is associated with an inherent opportunity cost.
In the international trade, it is acknowledged that the countries that produce goods with low opportunity costs perform better in trade. Such countries can afford to specialise in the manufacturing of some goods. The surplus goods can then be used to trade with the countries that may not have the necessary resources to produce the products and services or whose opportunity cost may be uneconomical. It has, therefore, been observed that international trade mostly takes place when individuals or countries specialise in the production of the goods and services that demonstrate the least opportunity cost. Economists also agree that trade is instrumental in making the production and consumption of products to increase among the trading countries.
The principle of absolute advantage has relevance in the current study. According to many scholars, labour is viewed as the only significant input. Thus, following the labour argument, absolute advantage can then be determined by the simple comparison of productiveness of labour. For instance, two countries may specialise in the production of only the goods that have absolute advantage. Then they exchange some of the goods. The absolute advantage approach claims that both countries are likely to end up with more of the goods. Such a situation is brought about by trade. Without the exchange of trade, each country would produce just enough for local consumption.
Both the Hecksher-Ohlin (H-O) model and Stolper-Samuelson (S-S) model are important because they are used to explain the existing relationships between production, pricing, and the expected returns from the international trade. They are mathematical theorems that have been applied widely when scholars engage in the analysis of the differences of products offered for trade from the various countries. The H-O model perspective suggests that many countries often export goods that exploit the abundance of the natural resources while importing goods that are likely to use the economy’s scarce factor. The S-S model is more concerned with economic assumptions given a constant scale, equality of factors, and competition, the increase in the price of a product should lead to an increase in the economic return of the factor that has the greater production contribution. Thus, the pricing of a product has an effect on the profitability of the products that are produced by the exporting countries such as the United States of America and Singapore.
The economy of scale is another theory in the realm of international trade. The theory is used to describe the cost advantages that many organisations obtain due to size, output, and scale of operation. In consideration of these factors, the cost per unit of the output is seen as decreasing with the increased scale as the fixed costs are broadened over the increased units of output. It means therefore, that the operational competencies increase with enhanced scale. The enhanced scales lead to the decrease in the variable cost. The Economies of scale theory can be applied to a variety of enterprises and business activities at various levels. For example, The United States of America utilises the economies of scale in its agricultural production. The agricultural sector has access to vast tracks of land. Consequently, the large scale farming allows for the exploitation of the land as a significant production factor. Additionally, the large scale farming allows for the practice of mechanised farming. The two main production factors in agriculture allow for the utilisation of the economies of scale to the benefit of the American farmers and traders.
Finally, the concept of imperfect competition envisions a competitive market situation that is characterised by many suppliers. However, the sellers are viewed as dealing with heterogeneous and dissimilar merchandise as opposed to the scenario in a perfect competitive market. In a perfect competitive market, there are many competing suppliers of similar products. The only differentiating factor is the price. The competition is anchored on the strategy of low pricing.
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