International Trade: Impact on Economic Development

Posted on Dec 9, 2024 in Economy

International trade plays a significant role in economic development by:

  • Increasing efficiency: Trade can lead to more and better products, and more efficient investment spending.
  • Creating new economic opportunities: Countries can access goods and services that may not be available domestically, and middle-income countries can access the markets of rich countries.
  • Increasing competition: Trade can lead to more competitive pricing and cheaper products.
  • Improving the global economy: Large-scale trade can improve the global economy and contribute to the development of participating countries.

Some other benefits of international trade include:

  • Increased revenues
  • Longer product lifespan
  • Easier cash flow management
  • Better risk management
  • Benefiting from currency exchange
  • Access to export financing
  • Disposal of surplus goods

Protectionist Trade Policies: For and Against

Protectionist trade policies are designed to restrict imports of foreign goods and services through tariffs, quotas, and other trade restrictions. The arguments for and against protectionist trade policies include:

Arguments for:

  • Create jobs: Protectionist policies can help create domestic jobs.
  • Increase GDP: Protectionist policies can boost a country’s GDP by increasing domestic production.
  • Protect national security: Protectionist policies can help ensure that a country doesn’t become too dependent on other countries for key products, technologies, or materials.
  • Counteract dumping: Protectionist policies can help counteract dumping, which is when a country sells products below cost to eliminate competition.
  • Protect infant industries: Protectionist policies can help protect newly developing industries from fully developed industries.

Arguments against:

  • Slow economic growth: Protectionist policies can slow economic growth over the long term.
  • Increase prices: Protectionist policies can lead to higher prices for consumers.
  • Limit consumer choice: Protectionist policies can limit the number of goods available to consumers.
  • Stagnate technological advancements: Protectionist policies can lead to a stagnation of technological advancements because domestic producers have no incentive to innovate.
  • Harm the people it’s intended to help: Protectionist policies can harm the people and entities it’s intended to help.

Dumping: Concept and Effects

Dumping is when a company or country sells a product in a foreign market at a price that’s lower than the price in the exporting country’s domestic market. It’s considered unfair competition because the price doesn’t accurately reflect the product’s cost.

Dumping can have both positive and negative effects:

Negative effects:

Dumping can harm the importing economy, lead to unemployment, and create monopolies. It can also cause small businesses and struggling industries to fail, which can lead to a decline in the standard of living for citizens.

Positive effects:

Dumping can lead to lower prices for consumers, force stagnant companies to become more innovative, and allow exporting companies to increase revenues.

Dumping is legal under World Trade Organization (WTO) rules unless the foreign country can show that the exporting firm has caused negative effects on its domestic producers. Countries can use tariffs and quotas to protect their domestic producers from dumping.

Causes of Unfavorable Terms of Trade

Unfavorable terms of trade for developing countries occur when the value of their exports decreases relative to the value of their imports. This can be caused by a number of factors, including:

  • Low-income elasticity of demand: When income in developed countries increases, demand for primary goods like raw materials and commodities doesn’t increase proportionately. This causes the prices of these goods to fall relative to other goods and services.
  • Changes in international demand: Changes in the structure of international demand for primary products can lead to unfavorable economic conditions.
  • Lack of diversification: Developing countries may not have the conditions necessary to develop their domestic economies.
  • Market imbalances: Market imbalances can contribute to unfavorable terms of trade.
  • Protectionist policies: Protectionist policies can contribute to unfavorable terms of trade.

Terms of trade (TOT) is the ratio of a country’s export prices to its import prices. It’s calculated by dividing the price of exports by the price of imports and multiplying the result by 100.

Scope of International Economics

The scope of international economics is wide and includes the study of economic interactions between countries. It covers a variety of topics, including:

  1. International trade: The flow of goods and services across borders, and the factors that affect it, such as supply and demand, economic integration, and trade policy.
  2. International finance: The flow of capital across international financial markets, and how these movements affect exchange rates.
  3. International monetary economics: The flow of money across countries, and how it affects their economies.
  4. International political economy: The impact of international conflicts, negotiations, sanctions, and other issues on the economy.
  5. The balance of payments: A country’s total payments and receipts to and from the rest of the world.
  6. Foreign exchange markets: The institutional framework for exchanging one country’s currency for another.

International economics also involves the use of quantitative measurements to analyze issues and evaluate solutions. Social measurement is particularly important in areas like international business, finance, and trade.

Free Trade Policy

A free trade policy is an economic policy where a government allows the exchange of goods and services across borders with little to no restrictions. This means that the government does not apply tariffs on imports or subsidies on exports.

Free trade policies can have several benefits, including:

  1. Increased trade: Free trade areas can increase the volume of international trade between member countries.
  2. Economic growth: Increased trade can boost economic growth by increasing export and import activities.
  3. Foreign investment: Greater market access can attract foreign direct investment.
  4. Job creation: Expanded trade opportunities can lead to job creation in export-oriented industries.

Free trade is the opposite of trade protectionism or economic isolationism. The idea of free trade was developed by British economists Adam Smith and David Ricardo. An example of a free trade agreement is the North American Free Trade Agreement (NAFTA), which was established in 1994 between the United States, Mexico, and Canada.

Quotas in International Economics

A quota in international economics is a government-imposed limit on the amount of a product that can be imported or exported over a specific period of time. Quotas can be used to regulate trade between countries and are often a part of protectionist policies.

Here are some things to know about quotas:

  1. Purpose: Quotas can be used to reduce imports, increase domestic production, or protect the quality or safety of products.
  2. Effectiveness: Quotas can be more effective than tariffs at restricting trade, especially if domestic demand for a product isn’t sensitive to price increases.
  3. Types: There are different types of quotas, including absolute quotas and tariff-rate quotas.
  4. Impact: Quotas can increase the price of a product, which can harm consumers by limiting their choices and making goods more expensive.

Terms of Trade

Terms of trade are defined as the ratio between the index of export prices and the index of import prices. If the export prices increase more than the import prices, a country has positive terms of trade, as for the same amount of exports, it can purchase more imports.

The Leontief Paradox

The Leontief paradox is an economic finding that a country with a higher capital per worker has a lower capital/labor ratio in exports than in imports. This finding contradicts the Heckscher–Ohlin theory, which states that a country’s exports reflect its most abundant commodity, such as labor or capital. Wassily Leontief (1906–1999) discovered the Leontief paradox in a 1953 study of the United States:

  1. Method: Leontief divided US industries into 50 sectors and then separated those sectors into import-competing and export industries.
  2. Finding: Leontief found that the capital/labor ratio for the US export industries was lower than the capital/labor ratio for the US import-competing industries.

The Leontief paradox led to the development of theories to explain why a country with an abundance of capital would have labor-intensive exports. One possible explanation is that the Heckscher–Ohlin model did not account for the role of natural resources in trade.