International Trade

International trade between different countries is an important factor in raising livingstandards, providing employment and enabling consumers to enjoy a greater variety of goods.

International trade has occurred since the earliest civilizations began trading, but in recent years international trade has become increasingly important with a larger share of GDP devoted to exports and imports.

There have also been growing concerns about the potential negative effects of trade – in particular, the unbalanced benefits with some losing out, despite overall net gains.

Importance of trade

1. Make use of abundant raw materials

Some countries are naturally abundant in raw materials – oil (Qatar), metals, fish (Iceland), Congo (diamonds) Butter (New Zealand). Without trade, these countries would not benefit from the natural endowments of raw materials.

A theoretical model for this was developed by Eli Heckscher and Bertil Ohlin. Known as the Heckscher–Ohlin model (H–O model) it states countries will specialize in producing and exports goods which use abundant local factor endowments. 

Countries will import those goods, where resources are scarce.

2. Comparative advantage

The theory of comparative advantage states that countries should specialize in those goods where they have a relatively lower opportunity cost. 

Even if one country can produce two goods at a lower absolute cost – doesn’t mean they should produce everything. 

India, with lower labour costs, may have a comparative advantage in labour-intensive production (e.g. call centres, clothing manufacture). 

Therefore, it would be efficient for India to export these services and goods. 

While an economy like the UK may have a comparative advantage in education and video game production. 

Trade allows countries to specialize. More details on how comparative advantage can increase economic welfare. 

The theory of comparative advantage has limitations, but it explains at least some aspects of international trade.

3. Greater choice for consumers

New Trade Theory places less emphasis on comparative advantage and relative input costs. 

New trade theory states that in the real world, a driving factor behind the trade is giving consumers greater choice of differentiated products. 

We import BMW cars from Germany, not because they are the cheapest but because of the quality and brand image. 

Regarding music and film, trade enables the widest choice of music and film to appeal to different tastes. When the Beatles went on tour to the US in the 1960s, it was exporting British music – relative labour costs were unimportant.

Perhaps the best example is with goods like clothing. Some clothing (e.g. value clothes from Primark – price is very important and they are likely to be imported from low-labour cost countries like Bangladesh. 

However, we also import fashion labels Gucci (Italy) Chanel (France). Here consumers are benefiting from choice, rather than the lowest price. 

4. Specialisation and economies of scale – greater efficiency

Another aspect of new trade theory is that it doesn’t really matter what countries specialize in, the important thing is to pursue specialization and this enables companies to benefit from economies of scale which outweigh most other factors. 

Sometimes, countries may specialize in particular industries for no over-riding reason – it may just be a historical accident. 

But, that specialization enables improved efficiency. For high value-added products, multinationals often split the production process into a global production system. 

For example, Apple designs their computers in the US but contract the production to Asian factories. 

Trade enables a product to have multiple country sources. With car production, the productive process is often even more global with engines, tyres, design and marketing all potentially coming from different countries.

5. Service sector trade

Trade tends to conjure images of physical goods import bananas, export cars. But, increasingly the service sector economy means more trade is of invisibles – services, such as insurance, IT services and banking. 

Even in making this website, I sometimes outsource IT services to developers in other countries. It may be for jobs as small as $50. Furthermore, I may export a revision guide for £7.49 to countries all around the world. 

A global economy with modern communications enables many micro trades, which wouldn’t have been as possible in a pre-internet age

6. Global growth and economic development

International trade has been an important factor in promoting economic growth. 

This growth has led to a reduction in absolute poverty levels – especially in south east Asia which has seen high rates of growth since the 1980s.