International Trade

Understanding international trade

If you walk into a supermarket and find Philippine bananas, Australian cherries or Korean instant noodles, you’re witnessing the effects of international trade in action. In another example, when you order a cup of brewed coffee in the United States, the main raw materials like coffee beans are actually imported from coffee-producing countries such as Brazil, Columbia or Vietnam.

In general, international trade refers to the buying and selling and the payment of goods and services across international borders. When a firm or individual buys goods and services abroad, living standards in both countries increase. In other words, trade among nations makes the world better off.

Buyers who buy abroad can have products that fit their needs more than similar domestic offerings or they may not be available domestically. Likewise, foreign producers also benefit by making more sales than they could sell in their own market. Yet when people buy foreign products because they are cheaper, the domestic producers will lose sales.

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Why countries trade

Different countries are endowed with different assets and natural resources including land, capital, labour and technology. These instinct characteristics enable some countries to produce the same good more efficiently, more quickly and at a lower cost than others. Therefore, they can sell it more cheaply than other countries might and benefit from the trade. This is also known as specialisation.

In addition, integration into the world economy and the growth of international trade have proven a powerful means for countries to promote economic development and poverty reduction. Most developing countries in Asia and Latin America have shared in this prosperity with a substantial increase in exports of manufactures and exports while attracting a bulk of foreign direct investment.

As one of the most important concepts of economics, trade was driven by comparative rather than absolute costs.

Absolute advantages

Absolute advantage refers to the ability of a person, company, or country can produce more output with the same amount of input, or the same output with fewer inputs.

Comparative advantages

Comparative advantage refers to the ability of an entity to produce a good or service at a lower opportunity cost compared to another entity.

Consider an example:

• Country X

  • Can produce 8 units of wine or 4 units of cheese with the same resources

  • The opportunity cost of producing 1 unit of wine = 0.5 units of cheese (absolute advantage)

  • The opportunity cost of producing 1 unit of cheese = 2 units of wine

• Country Y

  • Can produce 6 units of wine or 6 units of cheese with the same resources

  • The opportunity cost of producing 1 unit of wine = 1 unit of cheese

  • The opportunity cost of producing 1 unit of cheese = 1 unit of wine (absolute advantage)

In this case, Country X should specialize in wine production, and Country Y should specialize in cheese production. By doing so, they can trade and both benefit from higher overall production and consumption of both goods.

Criticisms against international trade

Barriers to trade

Trade barriers are restrictions or regulations imposed by governments to control or limit international trade. These barriers can take various forms and are typically used to protect domestic industries, manage trade deficits or respond to unfair trade practices.

The key types of trade barriers:

References

Brown, T & Foreman, C 2022, UH Macroeconomics 2022, OpenStax, Houston, TX, pp. 901-965.

Brad, M n.d., International Trade: Commerce Among Nations, International Monetary Fund, available at <https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Trade>.

International Monetary Fund 2001, Global Trade Liberalization and the Developing Countries, International Monetary Fund, available at <https://www.imf.org/external/np/exr/ib/2001/110801.htm>.

Reem, H 2024, International (Global) Trade: Definitions, Benefits, and Criticism, Investopedia, available at <https://www.investopedia.com/insights/what-is-international-trade/>.