Economic interdependence is the state that exists when two or more individuals, people, groups, businesses, or countries transact with each other (exchanging goods and services) to satisfy their needs. The situation mostly points towards the trade among two or more parties to make sure each of them has all the required goods and services.
Definition
“Economic interdependence refers to the relationship between two individuals, groups, sects, businesses, regions, or countries where each of them is dependent over the other for the supply of necessary goods and services.”
The concept of Economic Interdependence mostly applies where each party specializes in the production of a specific good or the provision of a specific service. And the exchange of those services is necessary to fulfill all the needs of both parties. This is the system by which companies and countries are economically dependent on each other.
Example
- One of the best and easiest examples of economic interdependence is international trade. Trade that takes place between two or more countries is due to the lack of production capabilities of a specific product of one country and the mastery in production of the same product of the other country.
For example, Asian countries having mild-to-hot weather enjoy the harvest of certain regional fruits, rice, and cotton. Other countries that might not be able to grow the same crops for themselves due to their weather, humidity levels, or any other reason, import these crops from Asia. Similarly, certain goods or products which cannot be manufactured in Asia are imported from other countries. This system makes different countries economically interdependent.
- Another example comes from the Superstore chain system of Walmart. Walmart sells the products of hundreds of companies. Therefore, Walmart relies upon these manufacturers and companies for the production of goods to be sold by Walmart.
On the other hand, all these companies and businesses are dependent on Walmart for the sale of their products. Both parties are therefore dependent upon each other for the fulfillment of their needs.
- The phenomenon of Economic interdependence also takes place in an advanced economy. Talking about the USA, has most of the manufacturing companies and production centers. Although they specialize in the production of all those goods, they can’t produce the raw materials for all those goods by themselves. They thus, have to import raw materials from other countries.
For example, the USA specializes in Auto Mobile manufacturing. However, it imports rubber for tires from South Asian countries. Similarly, textile production within America depends upon the import of high-quality cotton from different countries. Also, these products (cars and textiles) are then exported from the USA to the entire world. This makes the USA and the rest of the economy interdependent on each other for the fulfillment of their needs.
Understanding Economic Interdependence
Finding real-world examples of Economic Interdependence is pretty easy as it exists almost everywhere. All businesses, organizations, companies, and countries are deeply rooted in the whirl of economic interdependence. Every business is economically dependent on other businesses and so are countries.
The reason for such interdependency lies in the ability of each business, nation, or country to specialize in certain kinds of products only. Specialization results in better efficiency and higher quality so businesses tend to produce only specific kinds of goods, while the rest of them are either imported or outsourced.
Such a condition means that the operationality of every business can be slightly or greatly influenced if any other entity in the economy is affected. Therefore, each business is deeply bound to different segments of an economy and any economic change affects all businesses within an economy drastically.
Higher the product specialization, the higher the production efficiency. However, a higher specialization also means a higher economic interdependence. For instance, if an organization excels at producing baby food, it must have expert Pediatricians and nutritionists on board along with specialized working staff and equipment. However, it may not be possible for the company to grow wheat as well. Therefore, they would have to import it from a wheat vendor.
Similarly, the wheat vendor is dependent upon such food manufacturers for the sale of his wheat crop. In this way, every vendor, supplier, manufacturer, and business is dependent on other businesses for the continuity of their operations.
Causes of Economic Interdependence
Several factors contribute to the creation of economic interdependence. Some of these are discussed below.
- Industrialization
Industrialization leads to the advancement of economies which in turn triggers the in-house manufacturing of several products. When a country specializes in the production of a certain product, it then needs to import other products from other countries. An example is that of Asia (Pakistan); it specializes in the manufacturing of footballs however leather and other preparatory materials are imported from China.
Producing specialized goods enhances production efficiency and therefore, most countries only focus on their specialties, providing a narrow range of goods and services. This creates economic interdependence among nations; the need for outsourcing or importing other products for the fulfillment of basic needs.
- Economy advancement
As an economy develops, it focuses on establishing more industries and manufacturing more goods within the country's premises. This can lead to the creation of raw materials and other labor services from within the country or from neighboring economies.
Also. with advancement, an economy tends to move towards the rendering of services rather than the production of goods. This way the local product manufacturing industry revolutionizes into the services industry. Ultimately, these products are then imported from other countries, thus, boosting economic interdependence among nations.
- Regional Production
One main reason for high economic interdependence among economies is the region-specific production. Different regions observe different weather, different soil, and other conditions. Within such circumstances, they specialize in the production of certain goods and crops only, while other necessities are fulfilled by importing goods.
For example, China is one major exporter of Apples, it produces more than 41 million tons of apples each year. Blessed by the perfect climate and land to harvest apples, China is an expert in harvesting Apples. On the other hand, America exports Maize, Soybean, and Milk. Both of these countries exchange their products with each other and are economically interdependent.
- Labor Specialization
Another main driving force of Economic interdependence is Labor Specialization. When too many similar products are produced by one nation or a party, the production becomes specialized and economic interdependence takes place. That party then forms trading relationships with other parties for the supply of products and services that they cannot produce.
Pros & Cons of Economic Interdependence
To understand the concept of economic interdependence better, let us analyze how it can positively or negatively impact an economy. Below are some pros and cons of economic interdependence:
Pros
- Economic interdependence leads to more trading opportunities. Increased trade among countries promotes the exchange of goods and creates more earning opportunities at the national and international levels.
- Selling specialized goods within the same region may undergo tough competition. However, between different regions selling can be much easier. For example, selling oil within the Gulf countries may require much more marketing and selling tactics as compared to when it is supplied to Asian countries (which cannot extract oil from their homeland).
- Outsourcing all the side products and only focusing on your specialty leads to excellent production. For example, if a company manufacture cars and every minor and major spare part of the car itself, then it might not produce really good cars. The synergies of the company, in this case, would be divided which can affect the product quality.
On the other hand, if a company only focuses on assembling cars and outsources all the other car parts to specialized manufacturers, then this would bring in professionally manufactured spare parts and quality assembling of the automobiles.
- Another significant advantage of economic interdependence is diversification. Focusing and depending only upon the local market can expose you to an increased risk in case of any national catastrophes i.e. political factors, economic downturns, regional natural calamities, etc. Depending less on a single market and outsourcing different business segments can help mitigate this risk.
Cons
- Importing the goods can sometimes bring on a greater cost due to customs and freight charges upon imports. Also, the shipping costs can sometimes be too high. This can result in a higher cost of the end product born by the consumer, which can ultimately affect sales.
- Depending too much upon only one or fewer external suppliers can become too risky. In case of any catastrophe (legal changes, economic crash, financial crunch, natural calamities, etc.) in the region of the supplier of a principal raw material, the business operations can observe a halt.
- In case of a change of supplier due to any foreseen or unforeseen reason, the customers may not adapt to the change very soon. This can lead to substantial damage to brand repute and decreased sales.
- The fluctuation of currency exchange rates may make it difficult to continue with external supplies keeping the prices in control.
Globalization
Globalization is a by-product of Economic Interdependence. It triggers the spread of technology, products, labor, processes, and jobs all around the world. The cross-border flow of goods, products, and jobs creates international opportunities.
The motives of globalization are opportunistic and ideal. The development of a global market has advantaged many nations and businesses. On the contrary, some countries like Mexico and the US have also undergone a severe disruption due to increased market rivalry.
Globalization is a social, political, legal, and cultural phenomenon and it lends well to the economy of every country. Here is why globalization is important,
- Socially, Globalization triggers much interaction among different countries and nations which promotes the relationship between countries. Also, between businesses, it creates a reason to support each other as the collapse of any business would affect all other businesses too.
- Through the cross-border flow of products, jobs, and processes, the culture, traditions, and values of nations also flow which strengthens the inter-relations among different nations.
- Politically, globalization keeps international organizations like the UNO and WTO on the hook which is better for peaceful trade.
- On legal grounds, the promotion of globalization has led to the creation and enforcement of international laws that oversee the contracting party's rights.
Conclusion
- Economic interdependence is the situation where two or more parties (individuals, businesses, companies, countries, etc.) depend upon each other for the exchange of goods and the fulfillment of their necessities.
- Economic interdependence takes place between businesses when they rely on external suppliers for their business needs. Also, the international trade between countries triggers economic interdependence between them when one country specializes in the production of certain goods and relies on imports for their other needs.
- Many factors lead to the creation of economic interdependence such as industrialization, economic advancement, labor specialization, regional production, etc.
- Economic Interdependence also leads to Globalization which triggers international relations and an efficient trading system among economies.
- Advantages of Economic interdependence include the growth of international trade and earning opportunities, efficiency in production due to outsourced supplies, lesser risk due to diversification, etc.
- Disadvantages of Economic interdependence include the exchange rate fluctuations, higher import costs, risks associated with depending upon a sole supplier, etc.
FAQs
1. What is economic interdependence?
Economic interdependence is the situation where two or more parties (individuals, businesses, companies, countries, etc.) depend upon each other for the exchange of goods and the fulfillment of their necessities.
2. What are the main characteristics of economic interdependence?
The main characteristics of economic interdependence are the dependence of businesses on external suppliers for their goods and services, and the dependence of countries on other countries for the production of certain goods.
3. How does economic interdependence affect the world?
Economic interdependence creates a global market where goods, products, and jobs can flow freely across borders. This increased cross-border interaction promotes international relations and an efficient trading system among economies.
4. How do you measure economic interdependence?
Economic interdependence can be measured by the amount of trade that takes place between two countries. This can be done by looking at the value of exports and imports between the two countries.
5. How can economic interdependence benefit economies?
There are many advantages to economic interdependence, including the growth of international trade and earning opportunities, efficiency in production due to outsourced supplies, lesser risk due to diversification, etc.
