International Trade Concepts: Theories and Practices
Item 12: International Trade
Trade is the international or global exchange of goods, products, and services between two countries (an exporter and an importer). Foreign trade is the exchange of goods and services between economic regions, such as the EU and America. Economies participating in foreign trade are open economies. This process of external liberalization began in the second half of the twentieth century, notably in the 90s.
Theory of Absolute Advantage
Proposed by Adam Smith (1723-1790), this theory states that each country should specialize in producing goods for which it has an absolute advantage, measured by lower average production costs in terms of labor. All countries would gain from trade and achieve international efficiency.
Theory of Comparative Advantage
A comparative advantage is when a country can produce a product at a lower opportunity cost compared to another country. This theory, developed by David Ricardo, builds upon Adam Smith’s theory, focusing on relative costs rather than absolute costs.
Protectionism
Protectionism is an economic policy that protects domestic products by imposing restrictions on foreign imports, such as tariffs and import taxes, making foreign products less profitable. It is often applied during wars or for economic self-sufficiency.
Free Trade
Free trade is an economic doctrine advocating for no state intervention in international trade, allowing goods to flow based on each country’s advantages and business competitiveness. It assumes this will lead to optimal distribution of goods and services and efficient resource allocation worldwide.
Tariffs
A tariff is a tax on imported or exported goods, either ad-valorem (percentage of value) or specific (fixed amount per unit). Tariffs are used to generate government revenue or protect domestic industries.
Non-Tariff Barriers
- Quotas: Restrictions on the quantity of a product that can be imported, often implemented through limited export licenses.
- Voluntary Export Restraints (VERs): Self-imposed restrictions by the exporting country on the quantity exported, with similar price effects as quotas.
- Export Subsidies: Payments to companies selling goods abroad.
- Local Content Requirements: Mandates that a portion of imported goods be manufactured domestically to encourage local production.
Free Trade Areas
A free trade agreement (FTA) is a binding agreement between two or more countries to grant tariff preferences and reduce non-tariff barriers, aiming to deepen economic integration and market access.
Customs Unions
A customs union is a free trade area with a common external tariff, establishing a unified trade policy towards non-member states. It aims to increase economic efficiency and unity among member states.
Factors Influencing International Trade
- Exchange Rate: The relationship between currencies, affecting trade structures.
- Communication and Transport Technologies: Improvements in communication and transportation enhance trade.
Fair Trade
Fair trade proposes reciprocal rules, often requiring developed countries to open their markets to developing countries while addressing subsidies, export tariffs, minimum labor standards, exploitation, and capital flow control.