International Trade: Theories, Benefits, and Regulations
Introduction to International Trade
Modern economic theories about international trade started in the 16th century. We can consider two main doctrines:
- Mercantilism
- Free trade
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of great importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated western countries’ economic policy and discourse from the 16th to late-18th centuries.
Mercantilist policies included:
- High tariffs, especially on manufactured goods
- Monopolizing markets
- Exclusive trade with colonies
- Forbidding trade to be carried in foreign ships
- Export subsidies
- Banning all export of gold and silver
- Promoting manufacturing with research or direct subsidies
- Limiting wages
- Maximizing the use of domestic resources
Free Trade
Free trade is the economic doctrine in which there should be no control of foreign trade. The authors who most influenced this were Adam Smith and David Ricardo.
Adam Smith, named as the father of capitalism, described the principle of absolute advantage in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776).
Ricardo’s most famous work is his “Principles of Political Economy and Taxation” (1817). In this book, Ricardo develops the ideas of Smith and introduces the theory of comparative advantage. According to Ricardo’s theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations.
Benefits of International Trade
International trade is due to two causes:
- Uneven distribution of economic resources.
- Price difference, which is due to the ability to produce goods according to consumer needs and tastes.
International trade allows greater mobility of factors of production between countries, resulting in the following advantages:
- Each country specializes in those products which have higher efficiency, allowing better use of their productive resources and raising the living standards of their workers.
- Prices tend to be more stable.
- It enables a country to import those goods whose domestic production is not enough or are not produced.
- Enables the delivery of products that exceed consumption to other countries, in other markets (Exports).
Risks in Trade Relationships
Non-payment, Currency risk, Legal issues, Accidents, Force Majeure (natural disasters).
UN Specialized Agencies
There are several UN Specialized Agencies. Among them, we can find the following ones:
- IMO (International Maritime Organization)
- ICAO (International Civil Aviation Organization)
- IMF (International Monetary Fund)
- WBG (World Bank Group):
- IBRD (International Bank for Reconstruction and Development)
- IFC (International Finance Corporation)
- IDA (International Development Association)
- UNCTAD (United Nations Conference on Trade and Development)
- WTO (World Trade Organization)
GATT and WTO
GATT (General Agreement of Trade and Tariffs) was replaced by WTO (World Trade Organization); it regulates international trade rules.
IMO
The International Maritime Organization (IMO) is a specialized agency of the United Nations with 169 Member States and three Associate Members. The IMO’s primary purpose is to develop and maintain a comprehensive regulatory framework for shipping, and its remit today includes safety, environmental concerns, legal matters, technical cooperation, maritime security, and the efficiency of shipping.
ICAO
The International Civil Aviation Organization (ICAO) is a specialized agency of the United Nations. It codifies the principles and techniques of international air navigation and fosters the planning and development of international air transport.
OECD
The Organisation for European Economic Co-operation.
ICC
The International Chamber of Commerce.
INCOTERMS
Introduction to INCOTERMS
Incoterms are international rules that are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of the most commonly used terms in international trade. They reduce or remove misunderstandings from different interpretations of those terms.
Key aspects covered by INCOTERMS:
- Costs: Who is responsible for the expenses involved in a shipment at a given point in the shipment’s journey?
- Control: Who owns the goods at a given point in the journey?
- Liability: Who is responsible for paying damage to goods at a given point in a shipment’s transit?