Over the last century it is clear that some nations have developed more quickly than others. There may be a number of reasons for this, but this post will not explore those. Here we will explore a justification for international trade. Trade between all nations. As well as look at threats to the benefits of free trade. As well as if it has been successful.
So, what is International Trade?
It seems like an obvious question. International trade is trade between nations. However, the justification for international trade may enhance the definition.
Markets and trade are mechanisms that allow for individual selfish actions to result in positive group outcomes. This is because of the kind of market based knowledge distribution that Hayek describes.
Economists measure the world by “well-being”. While much philosophical debate surrounds the precise definition of the term, it is, for the most part obvious. E.g. having more food than one did before is an improvement in well-being. Having a shelter destroyed corresponds to a decrease in well-being. The argument is that international trade increases well-being for all involved parties.
The standard, local supply and demand curve equilibrium, that is, without international trade, is shown below. Let’s say this is country X’s sugar supply and demand curve.
There are two states the international market may be in when X opens its trade borders:
- The price of sugar is lower than what it normally trades for in X
- The price of sugar is higher than what it normally trades for in X
Both of these states create are a net positive to well-being.
1. The international price is higher than locally.
In this scenario, X wants to produce more. On the curve it is the intersection between the international price line, which would be higher than the current price line, and the supply line. By producing more the sugar producers can gain more by selling the sugar at a higher price than they were getting locally, and also, the nations they trade with get sugar for a lower price than they otherwise would have.
Country X’s sugar producers then employ more workers and pay higher wages. However, local consumers now pay a higher price for sugar.The international price is lower than locally.
2. The international price is lower than locally
Here, X will produce less sugar. If X can buy sugar for less than it makes it for, why bother? On the curve this is the intersection between a lower than local equilibrium price line and the supply line.
Now X’s sugar factories are hiring less workers and paying lower wages. However, X’s citizens get cheaper sugar.
Where’s the Benefit?
It may seem like both create wins and losses. When the industry wins, the consumer loses and vice versa. However, due to specialisation, this is not the case. With each country able to specialise, consumers get cheaper goods all round, and producers get the higher profits. That is, a new, international equilibrium is set that it is better for everyone. The descriptions of the above situations are in isolation. In reality if they are selling sugar for more, they are buying other things for less, which is a consumer gain, overall.
Threats to Free Trade
The above is a justification for free trade. That is trade with no tariffs or other regulatory restrictions when trading with other nations. A tariff is an additional cost exporters need to pay when exporting to the country imposing the tariff.
Tariffs artificially increase the cost of international goods; however, this cost is also passed onto the consumer because now domestic consumers have no international competition. They also reduce opportunities for developing nations. They might only have a small number of competitively priced exportable goods. If they cannot trade these for a higher price than they would locally, they cannot gain much from importing either.
When tariffs rule the politicians can influence price signals. With signalling mechanisms disrupted, the free market does not run as effectively as otherwise.
Has International Trade been Successful so far?
The theory suggests that it could only be successful, however, there are other metrics of success, rather than overall price benefits.
There has been a drastic decrease in global poverty since 1985. The poverty level set at $1/day. This correlates with a massive increase in international trade.
There was a growth in trade and capital flow between nations. Also, the technology transfer from the Global North to Global South enabled productivity increases in respective industries and advances in transport allowed for increased population mobility.
Despite the decrease in inequality between nations there still remains great inequality; and, increasingly, within wealthier nations. Which is outside the scope of this post.
The increased productivity in Western nations has resulted in more robust systems of government and also employment law and safety standards as methods of further increasing national well-being. Some countries don’t have such luxuries. Workers in third world countries must work in poor conditions for long hours in sweat shops to create the goods that we in the West consume for a low cost.
This doesn’t feel right, and many say this is a failure of globalisation and international trade. We’re here enjoying our Western ways, with cheap clothing, iPhones and daily coffees, and the third world is slaving away in factories that they weren’t slaving away in before. More productivity has also lead to more emissions. What can we do?
