Trade (What is it good for?)

One of this chapter’s readings focused on international trade and its impact. There are reasons why nations trade, and why issues arise.    

Trading goods and services makes economic sense. We trade across borders for the same reason that we trade with people in our country. Issues seem to arise when we start trading across borders, however.

There are specific reasons why we trade certain goods and services. First is the absolute advantage. The principle of absolute advantage is that if a country does something better than anyone else, that’s what they will export. That’s what they mostly sell and buy the rest of the commodities. But since most countries are not absolutely the best in one particular thing, there is also a principle of relative advantage. That is when countries export what they’re relatively better at, compared to their competitors - what they can produce relatively cheaper and relatively better.

The reason countries trade with each other isn’t just the absolute or comparative advantages though. The next reason is economies of scale. Certain productive processes can be done better and more cheaply when done on a larger scale, and a good example would be the United States and Europe exporting large aircrafts to the rest of the world. Another reason for trade is product differentiation. This refers to all products not being the same, and customers having choices. For instance, wines from California differ from the wines produced in South Africa, Australia or Europe.

Trade across borders also ensures a competitive environment at home and around the world. It weeds out bad businesses and promotes the strong ones.  

Trade, for all of the reasons above, is a good thing, and a natural thing. It has many good consequences. It does, however, also have adverse consequences. 

Big companies lobby for protectionism from imports. Companies that are not competitive enough should in fact lose out when there is more trade, or free trade (comparative advantage is a dynamic concept). Consequences of free trade should not be of concern because the losing companies can shift to doing something else or reallocate their resources.

There are times when companies’ need for tax breaks and subsidies is justified – mostly in their infancy – but it becomes a problem when it never ends. In some developing countries there are family or tribal ties to the government or have no mechanism for fighting corruption.

International trade implies restrictions: taxes on imports (and sometimes exports) are called tariffs. But there are also non-tariff barriers, or quotas, which indicate how much you can import in any one year. Other non-tariff barriers are licenses (have to obtain one before importing something) or product standards (e.g. standards for food and medications, or pollution emissions).

In light of today’s tariff increases, it is interesting to look to some economic stats. Up until a little while ago, in the modern-day era, for advanced states/alliances like the United States, Japan, Canada, Mexico, and Europe the average tariff was 3% to 4%. It was just a small tax. The largest differences among countries are in non-tariff barriers. WTO has come a long way negotiating tariffs and quotas but has not come anywhere near as far in terms of negotiating on non-tariff barriers. The reason for this is that some industries are very sensitive to local political situations like trade in steel, agricultural trade, and trade in other raw materials. It is often because of the non-tariff barriers that resources are not efficiently allocated around the world; where some industries are artificially propped up and are artificially kept out in other places.

Another huge issue is protectionism. There are times when companies band together and lobby against trade, and that isn’t good for anyone.  

AU SISG-774