International trade is the exchange of goods and services across national boundaries or between two countries. It is a trade that is transacted in the global arena and the principles of demand and supply are affected by international factors.
Political changes or conflict in a particular region will have a strong impact on international trade by altering factors such as the cost of labor, the costs of production or the cost of oil which may trigger an increase in prices of commodities. International trade is beneficial in the sense that it exposes consumers in different countries to a wide range of products.
At the international trade, the goods that are sold are exports and those that are bought are called imports. Global market gives the developed countries the opportunity to exercise leverage due their wealthy nature and their advantage over the countries at the periphery. International trade gives these countries chances to use their labor, technology and capital. The principle of comparative advantage as advocated by Ricardo and Adam Smith is more put into the practice in international trade.
Do countries benefit from international trade?
It is true that international trade is beneficial to countries in the globe. This is because it has been flourishing in the exchange of goods, services and also facilitates free flow of capital among nations. To substantiate the significance of international trade is evidence that international trade accounts for a large percentage of countries’ gross domestic products and an important generator of revenue in developing countries (Economy watch 1).
David Ricardo who was one of the classical economists in market principle of comparative advantage clearly illustrated how trade between countries can benefit several parties. He defined this benefit as that of gains from trade. It is noted that “the principle of comparative advantage shows that benefits of trade are dependent on the opportunity cost of production” (Globalization 1).
Adam smith, also a classical economist introduced the principle of absolute advantage. This theory argued that a country can only benefit from the principle of absolute advantage when it incurs the minimum cost of production.
Theories to explain international trade
Adam smith theory of absolute advantage
In his book the wealth of nations, Adam smith analyzed the operations in a modern international market. He identified two principles in his book: the division of labor and absolute advantage. According to Adam Smith, a country enjoys absolute advantage over its trading partners if it can produce more outputs with a certain amount of input. Therefore, if a country can participate in the production of what it has an absolute advantage on, then it will be in a position to enjoy the benefits of international trade.
Comparative Advantage Theory by David Ricardo
According to the theory of comparative advantage each country “will have a comparative advantage over its trading partners in the production of that good for which its opportunity cost is lower than that of its trading partner” (International trade theory 1).
Opportunity cost is defined as “what it takes to produce the last or the next unit of a good of the next best alternative product” (International trade theory 1). The following are the actual terms that facilitate the smooth flow of goods in international trade; first is the degree of relative bargaining by different nations which is determined by the level of prosperity and the market size that a country can control.
Another theory that explains international trade is the endogenous trade theory. This theory explains that some goods are traded at the international market because they not available in the local production, this applies for rare resources. Majority of the goods that this theory seeks to expound on include natural resources like mineral and oil.
Gold, oil and gas are only found in small locations or countries. When a country enjoys this endogenous advantage then it will be attractive. Goods such as oil and diamond, for example, have higher demand at the international market (Anderson 10).
The promotion of international trade is considered the province of the World Trade Organization (WTO). According to the Euro barometer report on the international trade, Europeans countries are positive in their evaluation of international trade and the reasons they give for this positive response is that through international trade they are in a position to access cheaper goods of wider variety.
Other countries like the Great Britain considered international trade as an avenue of creating employment (Euro barometer 1). From the above economic explanations it is imperative to explain that international trade has a lot of benefits to the trading partners which include the following:
From the principle of comparative advantage and absolute advantage, a country can be able to trade in goods that it can produce at the cheapest costs. This has the net effect of the country reaping more from the trade relationships which is positive in the gross domestic product.
Also the theory of endogenous principle is an indication that there are several commodities that are in demand at the international trade due to the fact that they are strategic and every country needs them; such goods include oil which is important in the production process of any commodity.
The exposure to the international trade increases the variety of goods available at the market. Not all countries produce similar goods and if, their quality is not similar. Also the issue of taste and preference by the customer who is the ultimate target of the production process is important in bringing goods to the market (International trade 1).
Countries also enjoy lower costs of commodities due to the economies of scale. An economy of scale is a fundamental principle in trading process. An industry that is small can only be profitable if it can sell to a small market. International market gives firms opportunity to enjoy a wider market (Mankiw 1).
Other benefits that are accrued from the international trade are new technologies which are spread out to other countries which are yet to develop. The underdeveloped countries thus get a chance to develop alongside the develop countries especially as they exchange ideas though international trade.
The main weakness of international trade is that weaker counties face stiffer competition from developed countries and some industries in the weaker countries will likely close down due to stiff competition.
Also another risk is the unreliability by trading partners for example a trading partner may consider it unfit to sell a specific commodity at particular times when it comes to matters of national security; a country might consider it fundamental not to sell food products to international market in times of extreme drought to safeguard its food security.
Developing countries also have the fear that their infant industries might collapse due to the competition from well established industries in the developed world.
This makes them to prohibit particular selected imports through trade quotas and trade tariffs. However it has been noted that: “such protectionist policies can be economically dangerous because they allow domestic producers to continue producing less efficiently and eventually lead to economic stagnation” (Globalization 1).
The risks of international trade are also in the sense where a country enjoys narrow degree of specialization and can be adversely affected when there is an unfavorable terms of trade in the demand market (Globalization 1).
International trade is considered instrumental since it creates an opportunity for countries to practice specialization and hence efficiently manage resources. It also enables a country to maximize its potential and its capacity to get what it does not produce.
The development and intensification of international trade has been made possible by the availability of advanced techniques of production, modern transport system, growth of transnational corporations or multinational corporations and the overwhelming growth in industrialization. International trade has emerged as a major driver of development among countries.
Most of the western countries can be said to have benefited most from international trade. The countries that are strong and prosperous in international trade have become wealthy and prosperous. It has in this sense led to the elimination of poverty.
The recent development in the international trade system that has involved the formation of trading blocs has impacted on the scope of international trade. Also it is worth to mention that there has been a decline in the international trade due to the changes in the rules and norms that characterized the foundations and the development of global trade which had been negotiated under the banner of General Agreement on Trade and Tariffs (GATT).
Anderson, James. Theories of international trade. Boston College, n.d. Web. July 17, 2011.
Economy watch. International Trade Benefit. Economy Watch, 2010. Web. July 17, 2011.
Euro barometer. International Trade. Euro Barometer, 2010. Web. July 17, 2011.
Globalization. Globalization of international trade. World Bank, 2010. Web. July 17, 2011.
International trade theory. International trade theory. University of West Florida, 2011. Web. July 17, 2011.
International trade. What is international trade? Investopedia, 2003. Web. July 17, 2011.
Mankiw, Gregory. Principles of economics. New York: Cengage Learning, 2008. Print.