If you can walk into a supermarket and find South American bananas, Brazilian coffee, and a bottle of South African wine, you are experiencing the effects of international trade.
International trade allows countries to expand their markets for both goods and services that may not otherwise have been available domestically. As a result of international trade, the market is more competitive, resulting in more competitive prices, affordable to the public, which leads to cheaper products for the consumer.
Ideas Clave
International trade is the exchange of goods and services between countries.
Global trade gives consumers and countries the opportunity to be exposed to goods and services that are not available in their own countries, or that would be more expensive domestically.
The importance of international trade was recognized early by political economists such as Adam Smith and David Ricardo.
Still, some argue that international trade can actually be bad for smaller nations, putting them at a greater disadvantage on the world stage.
Understanding international trade
The fundamental truth is that international trade was key to the rise of the global economy, where supply and demand, and therefore prices, affect and are affected by world events. Political change in Asia, for example, could result in an increase in the cost of labor, thus increasing manufacturing costs for an American sneaker company based in Malaysia, which in turn would result in an increase in the price charged at your local shopping center.
A decrease in labor cost, on the other hand, will likely result in you having to pay less for your new shoes. A product that is sold to the global market is called an export, and a product that is purchased in the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.
Global trade allows rich countries to use their resources, whether labor, technology or capital, more efficiently. Since countries are endowed with different assets and natural resources (land, labor, capital and technology), some countries can produce the same good more efficiently and therefore sell it cheaper than other countries. If a country cannot efficiently produce an item, it can obtain it by trading with another country that can. This is known as international trade specialization.
Let’s take a simple example. Country A and Country B produce sweaters and wine. Country A produces ten sweaters and six bottles of wine per year, while country B produces six sweaters and ten bottles of wine per year. Both can produce a total of 16 units. However, it takes country A three hours to produce the ten sweaters and two hours to produce the six bottles of wine (a total of five hours). Country B, on the other hand, takes one hour to produce ten sweaters and three hours to produce six bottles of wine (a total of four hours).
But these two countries realize that they could produce more by focusing on those products in which they have a comparative advantage. Country A starts producing only wine, and country B produces only sweaters. Each country can now create specialized production of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products.
We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specialization. More specifically, for each country, the opportunity cost of producing 16 units of sweaters and wine is 20 units of both products (after trade). Specialization reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With a greater supply, the price of each product would decrease, thus also giving an advantage to the final consumer.
Note that in the example above, country B could produce wine and cotton more efficiently than country A (in less time). This is called an absolute advantage, and country A can also have the same efficiency with a higher level of technology.
According to international trade theory, even if one country has an absolute advantage over another, it can still benefit from specialization.
Origins of comparative advantage
The law of comparative advantage is popularly attributed to the English political economist David Ricardo. It is discussed in his book “On the Principles of Political Economy and Taxation” published in 1817, although it has been suggested that Ricardo’s mentor, James Mill, was probably the first to propose it.
David Ricardo showed how England and Portugal benefit from specializing and trading according to their comparative advantages. In this case, Portugal was able to make wine at a much lower cost, while England was able to make cloth at a lower cost. Ricardo had predicted that each country would eventually recognize these facts and stop trying to make the product that was most expensive for each country to produce.
In fact, as time went by, England stopped producing wine and Portugal stopped making cloth. Both countries saw it advantageous to stop their efforts to produce these items each at home and instead trade with each other.
Quick Fact : Some scholars have recently argued that Ricardo didn’t actually have the idea of comparative advantage within his Principles. Instead, the idea may have been inserted into the text by its editor, the political economist and moral philosopher James Mill.
A contemporary example is China’s comparative advantage with the United States in the form of cheap labor. Chinese workers produce simple consumer goods at a much lower opportunity cost. The United States’ comparative advantage is in skilled, capital-intensive labor. American workers produce sophisticated goods or investment opportunities with lower opportunity costs. Specializing and trading in this line benefits everyone.
The theory of comparative advantage helps explain why protectionism has not traditionally been successful. If a country withdraws from an international trade agreement, or if a government imposes tariffs, it can produce an immediate local benefit in the form of new jobs in a given industry. However, this is often not a long-term solution to a business problem. Eventually, that country will grow up at a disadvantage relative to its neighbors: countries that were already better able to produce these items at a lower opportunity cost.
Criticisms of comparative advantage
Why doesn’t the world have open trade between countries? When there is free trade, why do some countries remain poor at the expense of others? There are many reasons, but the most influential is something economists call rent seeking. Rent seeking occurs when a group organizes and pressures the government to protect its interests.
Say, for example, UK t-shirt producers understand and agree with the free trade argument, but they also know that their narrow interests would be negatively affected by cheaper Vietnamese-produced t-shirts. Even if workers were more productive by switching from making T-shirts to making computers, no one in the T-shirt industry wants to lose their job or see profits decline anytime soon.
This desire could lead T-shirt manufacturers to push for special tax breaks for their products and/or additional tariffs (or even outright bans) on foreign T-shirts. Calls abound to save local jobs in Europe and America and preserve local businesses, although in the long run the domestic workers who produce these garments would be made relatively less productive and British consumers relatively poorer by such protectionist tactics.
Other possible benefits of global trade
International trade not only results in greater efficiency, but also allows countries to participate in a global economy, encouraging the opportunity for foreign direct investment (FDI), which is the amount of money that people invest in companies and assets. foreign. In theory, economies can therefore grow more efficiently and more easily become competitive economic participants.
For the host government, FDI is a means by which foreign currency and expertise can enter the country. It raises employment levels and, in theory, leads to growth in gross domestic product (GDP). For the investor, FDI offers company expansion and growth, which means higher income in multiple markets
Free trade internationally vs. Protectionism
As with all theories, there are opposing points of view. International trade has two contrasting views regarding the level of control over trade:
Free trade: the simpler of the two theories (a laissez-faire approach ) with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production is carried out efficiently. Therefore, nothing needs to be done to protect or promote trade and growth, because market forces will do it automatically.
Protectionism: Holds that the regulation of international trade is important to ensure that markets function properly. Proponents of this theory believe that market inefficiencies can hinder the benefits of international trade, and their goal is to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs, subsidies, and quotas. These strategies attempt to correct any inefficiencies in the international market.
As it opens up the opportunity for specialization and therefore more efficient use of resources, international trade has the potential to maximize a country’s ability to produce and acquire goods and services. However, opponents of global free trade have argued that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of flux, and as it develops, so must its participants.
Historical overview of international trade
The exchange of goods or services between different peoples is an ancient practice, probably as old as human history. However, international trade refers specifically to an exchange between members of different nations, and accounts and explanations of such trade begin (despite earlier fragmentary discussion) only with the rise of the modern nation-state at the end of the Age. European average.
As political thinkers and philosophers began to examine the nature and function of the nation, trade with other countries became a particular topic of their research. Consequently, it is not surprising to find one of the first attempts to describe the function of international trade within that highly nationalist body of thought now known as mercantilism.
Mercantilism
Mercantilist analysis, which reached its peak of influence on European thought in the 16th and 17th centuries, focused squarely on the well-being of the nation. He insisted that the acquisition of wealth, particularly wealth in the form of gold, was of paramount importance to national politics. The mercantilists took the virtues of gold almost as an article of faith; Consequently, they never tried to adequately explain why the search for gold deserved such a high priority in their economic plans.
Mercantilism was based on the conviction that national interests are inevitably in conflict: that one nation can increase its trade only at the expense of other nations. Governments were therefore forced to impose price and wage controls, encourage domestic industries, promote exports of finished products and imports of raw materials, while limiting exports of raw materials and imports of raw materials. finished. The state strove to provide its citizens with a monopoly on the resources and outlets of its colonies.
The trade policy dictated by mercantilist philosophy was consequently simple: encourage exports, discourage imports, and take the proceeds of the resulting export surplus into gold. The ideas of the mercantilists were often intellectually superficial, and in fact their trade policy may have been little more than a rationalization of the interests of a rising merchant class that wanted larger markets, hence the emphasis on expanding exports. , along with protection against competition in the form of imported goods.
A typical illustration of the mercantilist spirit is the English Navigation Act of 1651, which reserved to the country of origin the right to trade with its colonies and prohibited the importation of goods of non-European origin unless transported on ships flying the English flag. This law it persisted until 1849. A similar policy was followed in France.
Liberalism
A strong reaction against mercantilist attitudes began to take shape in the mid-18th century. In France, economists known as physiocrats demanded freedom of production and trade. In England, the economist Adam Smith demonstrated in his book The Wealth of Nations (1776) the advantages of eliminating trade restrictions. Economists and businessmen expressed opposition to excessively high and often prohibitive customs tariffs and urged the negotiation of trade agreements with foreign powers. This change in attitudes led to the signing of a series of agreements incorporating new liberal ideas on trade, including the Anglo-French Treaty of 1786, which ended what had been an economic war between the two countries.
After Adam Smith, the basic principles of mercantilism were no longer considered defensible. However, this did not mean that nations abandoned all mercantilist policies. Restrictive economic policies were now justified by the claim that, to some extent, the government should keep foreign merchandise out of the domestic market to protect domestic production from foreign competition. To this end, customs taxes were introduced in increasing numbers, replacing direct import bans, which became less and less frequent.
In the mid-19th century, a protective customs policy effectively protected many national economies from external competition. The French tariff of 1860, for example, charged extremely high rates on British products: 60 percent on pig iron; 40 to 50 percent on machinery; and 600 to 800 percent in wool blankets. Transportation costs between the two countries provided greater protection.
A triumph for liberal ideas came with the Anglo-French trade agreement of 1860, which stipulated that French protective duties were to be reduced to a maximum of 25 percent over five years, with free entry for all French goods except wines, in Great Britain. This agreement was followed by other European trade pacts.
Resurgence of protectionism
A reaction in favor of protection spread throughout the Western world in the latter part of the 19th century. Germany adopted a systematically protectionist policy and it was soon followed by most other nations. Shortly after 1860, during the Civil War, the United States dramatically raised its tariffs; The McKinley Tariff Act of 1890 was ultra-protectionist. The United Kingdom was the only country that remained faithful to the principles of free trade.
But the protectionism of the last quarter of the 19th century was mild compared to the mercantilist policies that had been common in the 17th century and were to be revived between the two world wars. Extensive economic freedom prevailed in 1913. Quantitative restrictions were unheard of and customs duties were low and stable. The currencies were freely convertible into gold, which was in effect a common international money. Balance of payments problems were few. People who wanted to settle and work in a country could go wherever they wanted with few restrictions; they could open businesses, enter commerce, or export capital freely. Equality of opportunity to compete was the general rule, the only exception being the existence of limited customs preferences between certain countries, usually between a country of origin and its colonies. Trade was freer throughout the Western world in 1913 than in Europe in 1970.
The “new” mercantilism
World War I wreaked havoc on these orderly trading conditions. By the end of hostilities, world trade had been disrupted to a degree that made recovery very difficult. The first five years of the postwar period were marked by the dismantling of war controls. An economic recession in 1920, followed by trade advantages accruing to countries whose currencies had depreciated (as had Germany’s), led many countries to impose new trade restrictions. The resulting protectionist tide engulfed the world economy, not because policymakers consciously adhered to any specific theory, but because of nationalist ideologies and the pressure of economic conditions. In an attempt to end the continued rise of customs barriers, the League of Nations organized the first World Economic Conference in May 1927. Twenty- nine states, including major industrial countries, signed up to an international convention that was the most detailed and balanced. multilateral trade agreement approved to date. It was a precursor to the agreements made under the General Agreement on Tariffs and Trade (GATT) of 1947 that would later give birth to the WTO.
However, the 1927 agreement remained practically without effect. During the Great Depression of the 1930s, unemployment in major countries reached unprecedented levels and generated an epidemic of protectionist measures. Countries attempted to shore up their balance of payments by raising customs tariffs and introducing a range of import quotas or even import bans, accompanied by exchange controls.
Beginning in 1933, the recommendations of all postwar economic conferences based on the fundamental tenets of economic liberalism were ignored. Foreign trade planning came to be considered a normal function of the state. Mercantilist policies dominated the world scene until after World War II, when trade agreements and supranational organizations became the primary means of managing and promoting international trade.
