International Economic Relations and Trade: A Comprehensive Guide
International Economic Relations: Trade
The Interplay of Economics, Politics, and Social Interests
Economic decisions are never made in a vacuum. They’re always intertwined with the social and political interests of various groups and sectors, often leading to contradictions. Economics isn’t a neutral science; it reflects different perspectives and ideologies.
Economic Liberalism vs. Government Control
A central debate in economics revolves around the role of government. Should it intervene in the economy, or should the market be left to its own devices? Proponents of economic liberalism advocate for minimal government intervention, while others argue for greater government control.
The Rational Self-Interest of Man
Classical economic theory, dating back to the 18th century, posits that humans are inherently self-interested and rational. Individuals seek what benefits them most and invest accordingly. This pursuit of self-interest, coupled with free competition, drives specialization and increased production.
Adam Smith and the Critique of Mercantilism
Adam Smith, a prominent economist, criticized mercantilism and state protectionism. He believed they hindered economic growth. He argued that a free market, where investments flow to the most productive and profitable activities, would be more beneficial.
The Theory of Comparative Advantage
This theory suggests that countries should specialize in producing goods and services where they have a comparative advantage – that is, where they can produce more efficiently than other countries.
The Shifting Landscape of Globalization
In today’s globalized world, the service sector has gained prominence. However, industry remains significant, often by outsourcing services.
The Concept of an Isolated Economy
An isolated economy is one that does not engage in international trade.
List’s Contribution to Trade Theory
German theorist Friedrich List agreed with the theory of comparative advantage but added the concept of natural and constructed advantages. Natural advantages stem from geological and climatic conditions, while constructed advantages are built upon industrial development. List advocated for protectionism to foster technological innovation.
Raul Prebisch and ECLAC – UN
As income grows, the demand for manufactured goods and services tends to increase more rapidly than the demand for agricultural products.
Brazil’s National Bank for Economic and Social Development (BNDES), established to support industrialization, received technical and intellectual backing from the Economic Commission for Latin America and the Caribbean (ECLAC).
The Impact of Exchange Rates
Exchange rates determine the relative prices of agricultural and manufactured goods. Because manufacturing often boasts higher productivity, increased production can lead to lower prices.
Economic Integration and Regional Trade Agreements
These agreements involve two or more countries working together to liberalize trade among themselves.
Protectionism and Its Barriers
Protectionism arises when barriers are erected to hinder competition. The most common barrier is the import tax. Invisible barriers, disguised as sanitary measures or other regulations, can also be used to restrict imports.
Dumping and Anti-Dumping Laws
Dumping occurs when goods are sold below cost to undermine competitors. Anti-dumping laws aim to protect competition.
The BNDES and Allegations of Dumping
The BNDES offered below-market interest rates to support industrialization. This led to accusations of dumping by other countries, but these claims often served as a pretext to protect domestic industries.
The Case of Chinese Products
The lower cost of Chinese products often stems from lower wages due to a large labor supply. This doesn’t necessarily constitute dumping, as it reflects China’s social and economic reality.
Ways to Trade Agreement
- Free Trade Zone: Characterized by the reduction or elimination of import barriers, primarily tariffs. Examples include NAFTA and FTAA.
- Customs Union: A free trade zone with a common external tariff. Example: MERCOSUR.
The advantage of a customs union is the creation of a larger, barrier-free market, leading to increased production and lower prices.
Common Market
A customs union with the added benefit of free movement of production factors, such as capital and labor. Example: European Common Market.
Economic and Monetary Union
A common market with a single currency. Example: The Eurozone. The objectives are to expand production scale, unify economic strategy, and provide an alternative to the U.S. dollar.
Advantages and Disadvantages of Economic Integration
Static Viewpoint
Focuses on the immediate effects of integration without considering long-term consequences. Trade diversion can occur when purchases shift to less competitive sources.
Dynamic Viewpoint
Considers the long-term effects of integration. Trade diversion can be seen as positive, as it can force countries to become more competitive and increase productivity.