International Trade: Principles, Advantages, and Protectionism
Fundamentals of International Trade
Item 13: Fundamentals of International Trade. International trade is not different from the trade that occurs within the borders of a state, nation, or region. The use of different currencies leads to foreign exchange, which also creates a market for trading foreign currency. Similarly, foreign trade transactions are recorded in a document called the balance of payments. The main rationale is derived from the distribution of productive factors. Some countries have an abundance of cereals, while others have a special ability to produce clothes. Obeying this distribution of resources and capabilities, it is most advantageous to acquire goods from outside the country. Remember that trade is the exchange of goods, services, and factors of production across countries. Sales from a country to the rest of the world are called exports, and purchases from the rest of the world are called imports.
Specialization and Trade
If the system allows each agent to specialize in what they do best, and if work is divided according to this criterion, the sum of productions from workers and businesses would be optimized because everyone does what they do best. This is the foundation of the division of labor. Each one is dedicated to what they are most productive at when they have an absolute advantage, and it makes sense to do so. However, this is not enough to explain international trade. Foreign trade is explained by:
- The different natural resource endowments and production factors.
- The technology available at a given time in each country.
- The difference in costs between products in each country.
- The tastes of consumers, who may wish to purchase goods not produced domestically.
This causes countries to specialize in international items with relative or comparative advantages, increasing economic efficiency.
Protectionism
Protectionism is based on a set of measures advocated by a nation to penalize foreign competition. The arguments for protectionism are varied:
- Protection for businesses to protect their workers. If wages in other countries are very low, there would be a danger of competing with them, and there would be no choice but to reduce the country’s own wages.
- Health protection for consumers, as it is uncertain whether the quality of imported products is adequate.
- Protection of new industries in the country, allowing them to grow without the commercial aggression of industries in third countries, which would make it impossible for them to settle.
Non-Economic Policy Topics
Commercial policies are designed to increase the price of imported products in the destination market, thus giving an advantage to domestic products. These policies include:
Tariffs
Tariffs are taxes on certain goods, expressed as a percentage of the value of the property. The higher the tariff, the greater the degree of protection.
Quotas
Quotas are quantitative restrictions on the number of goods allowed for import. The wider the quota, the more permissive the entry of goods and the less protectionist the system is.
Normative Barriers
These are standards of quality in the form of demands for products whose violation leads to a ban on foreign products entering the market. For example, the requirement that a food product follows certain guarantees of origin, handling, manufacturing process safety, etc. If these barriers are very arbitrary, they can lead to a much higher burden of protection than traditional instruments.
Internal Promotion Policies
Another way to hamper the entry of foreign products is to grant benefits to domestic firms, such as:
- Grants: Money that states grant to their companies based on political or economic interests.
- Credit facilities: Facilitating access to convenient and cheap bank loans for companies in the country.
- Tax relief: Tax deductible amounts and other types of financial aid.