International Trade: Impact on Global Economy
**International Trade: Impact on Global Economy**
When trade crosses national borders, it becomes international trade. The goods and services a country sells abroad are exports, and those it buys from other countries are imports.
**Why Nations Trade**
- Unequal Distribution of Natural Resources: Some natural resources occur only in certain countries, making them unique exporters of these resources.
- Differences in Consumer Tastes: Even if two countries have very similar production methods, trade can be established if their consumers have different tastes.
- Difference in Production Costs: Countries tend to export goods that they can produce relatively more cheaply.
- Uneven Technological Development: Differences in technological development between countries mean that certain new or advanced products are only produced in some countries.
**Effects of International Trade**
International trade allows countries to exchange abundant resources for those that are scarce or unavailable in their territory. Consumers enjoy a greater variety of goods. Businesses can access a much broader market to sell their products, leading to greater opportunities for specialization, which is a necessary condition for increased productivity.
**Principle of Comparative Advantage**
Formulated in 1817 by English economist David Ricardo, the principle of comparative advantage states that a country will tend to specialize in and export goods that it can produce at a relatively lower cost compared to other countries.
**Intra-Industrial Trade**
Intra-industrial trade occurs when two countries exchange goods within the same industry or sector.
**Benefits of Intra-Industry Trade**
- Allows consumers in each country to enjoy a greater variety of goods.
- Fosters greater competition in markets, as domestically produced goods compete with those produced globally.
- Allows for full exploitation of economies of scale. Some sectors cannot reach the optimal size if companies operate solely in the typically small domestic market.
**Trade Barriers: Protectionism**
Protectionism refers to government measures aimed at restricting imports to protect national products from foreign competition.
**Tariffs**
A tariff on an imported product is a tax imposed by the government. Tariffs have two objectives:
- Make imported products more expensive in the national market, thus favoring domestic producers.
- Serve as a source of revenue for governments.
The result of imposing a tariff is an increase in price and a reduction in consumer demand.
**Non-Tariff Measures**
- Quotas for Export: With quotas, a government limits the number of units that can be imported. These are quantitative restrictions on imports. Therefore, quotas also increase the price of products and reduce consumption.
- Voluntary Export Restraint Agreements: These are bilateral agreements where the government or industry of the exporting country agrees to reduce or restrict its exports, so the importing country does not have to resort to quotas, tariffs, or other import barriers.
- Export Subsidies: A national company receives financial support from the government to export goods. The government aims to make domestic firms more competitive in international markets. Export subsidies are considered unfair competition, as they may allow some companies to sell their products below cost.
- Other Non-Tariff Barriers:
- Technical or medical requirements designed to exclude foreign products or impose additional costs.
- Bureaucratic rules that discourage trade.
- Public procurement policies that favor products of national origin.
**Effects of Trade Barriers**
Trade barriers reduce international trade by restricting imports and reserving more of the national market for domestic firms, which then become less concerned about exporting. These measures lead to increased prices and reduced diversity of supply, harming consumers. Local products face less pressure to be competitive and produce efficiently at lower prices. Imposing barriers can trigger trade wars. If a country imposes a tariff, affected countries may retaliate with tariffs on goods sold by the other country.
**Protection and Free Trade, WTO**
Protectionist positions argue for measures to impede international trade to protect national industries from foreign competition. Free trade positions advocate for minimal state interference in international trade. Currently, no one defends autarky (a self-sufficient economy independent of the outside), but neither is complete free trade (the absence of any barriers) universally advocated. Protectionist measures involve government attempts to restrict imports to protect national producers from foreign competition, ultimately reducing international trade.
**Arguments in Favor of Free Trade**
Free trade allows countries to leverage their comparative advantages, leading to a greater variety of goods, increased competition, and benefits from economies of scale, ultimately increasing productivity.
**Justifications for Protectionism: The Emerging Industry Argument**
A nascent industry in a country might struggle against established, more competitive industries in other countries that already dominate the market. These mature industries produce more competitive and cheaper products. Temporary support for national companies could help these new industries grow and benefit from economies of scale and learning by doing. Consumers would initially pay higher prices, but once the industry matured and could produce at lower costs, competing with the rest of the world, the tariff could be withdrawn, and consumers would enjoy the product at a reduced price. However, the protected industry might never reach the efficiency levels of foreign industries, becoming dependent on government protection, and the need for protection might even increase. A better strategy is to develop emerging industries through significant human capital investment and infrastructure to attract foreign direct investment.
**Other Arguments**
Trade barriers are often proposed by groups of producers acting as lobbyists, seeking government protection from international competition. Governments might impose tariffs on imported products to make them less competitive, allowing domestic industries to grow. In other cases, certain strategic sectors are defended for national security reasons.
**The World Trade Organization (WTO)**
Since the end of World War II, a free trade current has predominated. The WTO, a United Nations body with 151 member countries, creates rules governing trade between nations, aiming to ensure smooth and free trade flows. Its goal is a progressive reduction of international trade barriers. The WTO was established in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT). Member countries meet and reach agreements on trade liberalization for specific products, product by product, rather than creating general rules. These agreements result from negotiations where each country has different interests depending on the product being exported or imported. Multilateral negotiations are ongoing in the Doha Round to open international trade in agriculture and services.