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The Effects of the International Trade on the UAE Economy

Two simple ways to understand the potential benefits of free trade are through David
Ricardo's theory of comparative advantage and by analysing the impact of a tariff or import
quota.

(David Ricardo's theory of the benefits of international trade)

David Ricardo, working in the early part of the 19th century, he realised that absolute
advantage was an incomplete case of a more general theory. For example, Portugal can
produce both wheat and wine with less cost than England (in other words it has an
absolute advantage in both goods). What David Ricardo saw was that it could still be
mutually beneficial for both countries to specialise and trade. Look at figure 1
Figure 1

In Figure 1, a component of wine in England costs the same amount to produce as 2


components of wheat. If an extra component of wine produced that means foregoing
production of 2 components of wheat (ie the opportunity cost of a component of wine
is 2 units of wheat). In Portugal, a component of wine costs 5 components of wheat to
produce (i.e. the opportunity cost of a unit of wine is 5 components of wheat in
Portugal).
Portugal is relatively better at producing wine than wheat: so Portugal is said to have
a comparative advantage in the production of wine. England is relatively better at
producing wheat than wine: so England is said to have a comparative advantage in
the production of wheat.
However Figure 2 shows how trade might be beneficial. Costs of production are as set
out in Figure 1. England is alleged to have 270 man hours available for production.
Before trade takes place it produces and consumes 8 components of wheat and 5
components of wine. Portugal has less labour force with 180 man hours of labour
available for production. Before trade takes place it produces and consumes 9
components of wheat and 6 components of wine. Total production between the two
economies is 17 components of wheat and 11 components of wine.
Figure 2

If both countries now specialise, Portugal producing only wine and England producing only
wheat, total production is 18 components of wheat and 12 components of wine.
Specialisation has enabled the world economy to increase production by 1 component of
wheat and 1 component of wine.

The advantages of International Trade

1. There are no transport costs.


2. Costs are constant and there are no economies of scale.
3. There are only two economies producing two goods.
4. The theory assumes that traded goods are consistent.
5. Factors of production are assumed to be perfectly mobile.
6. There are no tariffs or other trade barriers.
7. There is perfect knowledge, so that all buyers and sellers know where the
cheapest goods can be found internationally.
However, the other method to understand the potential benefits of free trade is to
analyse the impact of tariffs or import quota.
1. What is tariff? Tariffs are usually associated with protectionism,
the economic policy of restraining trade between nations. For political reasons,
tariffs are usually imposed on imported goods, although they may also be
imposed on exported goods.
2. What is import quota? An import quota is a type of protectionist trade restriction that
sets a physical limit on the quantity of a good that can be imported into a country in a
given period of time. Quotas, like other trade restrictions, are used to benefit the
producers of a good in a domestic economy at the expense of all consumers of the
good in that economy.

Know a day’s countries with great ambitions, they consider David Ricardo's
theory is the best way to improve and boost up their economy, because it allow
them to specialise and use the resources available on one major project in terms
of opportunity cost and at the same time it open up borders between countries
and help them to benefit from each other and ease the international trade
between countries.
On the other hand tariffs and import quota are used to protect the local firms
from being overrun by other major firms from abroad, but at the same time it
can harm the country in terms of opportunity cost in technology and
development.

A good example of an International Trading country is UAE. The United Arab Emirates
is located along the flat coastal plains of the Arabian Golf. It has several sheikdoms which
include Abu Dhabi, Dubai, Ajman, Fujarah, Sharjah, Umm al-Qaiwain and Ras al-
Khaiman. Eighty percent of the total land area is in Abu Dhabi. The major contributory
factor in its rapidly-growing economy is petroleum.

UNITED ARAB EMIRATES' TRADE WITH MAIN PARTNERS (2009)

Figure 3

China and the UAE Trades

The total trade reached an estimated figure of $119.4 billion between 1999 and 2009 and the
UAE has main concern is to strengthening the relationship by spreading ties with the
booming Chinese economy by investing in areas such as finance, real estate and construction.
The UAE has run a trade deficit with China in recent years. Furthermore the total export has
been growing at an average of 37.9% between 1999 and 2009. On the other side, total
imports have been growing at a rate of 31.1%during the same period.

It is sad that the two-way trade between the UAE and China to grow to $100 billion by 2015,
from $14.2 billion in 2006.

An analysis sad that UAE businesses have gained from the country’s geographic location, its
cost and market advantages as well as its status as an international business heart in order to
ease trade growth. The positive business environment that the UAE has created over the years
has meant both local and foreign businesses have been able to grow, expand and in-turn
export their goods and services to the wider global economy. The capacity of the UAE to
efficiently move goods and connect manufacturers and consumers with international markets
worldwide has improved over the years. The analysis pointed out that trade between both the
sides has mostly centred on base metals and related materials coming out of the UAE and
cheap Chinese goods coming into the UAE.

Figure 4
US Trade with the UAE
In 2009, the UAE was the main export market for the US in the Middle East and the 19th
major export market worldwide, ahead of Spain, Ireland and Indonesia. UAE exports to the
US raised by 53% between 2000 and 2009, from $971.7 million to $1.49 billion. at the same
time as UAE imports of US goods drop off from 2008 to 2009, all of the US top 30 export
markets saw a proportion drop and, overall from 2000 to 2009 UAE imports of US goods
raised more than five-fold from $2.29 billion to $12.1 billion, as shown in the Figure 5

Figure 5
Figure 6

The European Union holds 21% of the UAE international trade in the world.

Even with the worldwide financial crisis Germany and Italy were the 2 largest trading
partners of the UAE among the European countries in 2009. Due to the financial crisis has
dropped by 24% in 2009.

Nevertheless, the trade between the UAE and Italy is less than between Italy and other main
Italian trade partners, such as France, the UK, and the US in 2009. Therefore the relation with
Italy and Germany is stronger than the other major trading countries.

Italy is known as the leading manufacturer of luxurious goods worldwide, such as furniture
manufacturing.

Japan hold 14% of the UAE international trade

The total of UAE exports to Japan was $22.7 billion in December 2009 comparing with the
2008 figure which was $46.41 billion

On the other hand, the total imports from Japan was $6.5 billion in 2009 comparing with the
2008 figure which was $10.79 billion

In conclusion the UAE seem to be in a good position in terms of international trade because
of its strategic location and its high supplies of goods services and it is considered to be one
of the largest suppliers of oil in the world and the Middle Eastern countries, however UAE is
recovering rapidly from the financial crisis that hit the world in 2008 according to many
analysis.

http://www.uaeinteract.com/docs/UAE_least_dependent_on_oil_exports/
34246.htm
http://www.uae-embassy.org/business-trade/trade-export

“Francesco Alfonsi”

http://www.khaleejtimes.com/biz/inside.asp?
xfile=/data/business/2010/February/business_February396.xml
&section=business

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