International Trade – Introduction

The Costs and Benefits of international trade – An introduction

So over the next few posts I am going to be considering the costs and benefits of international trade. Rather than just doing a list I thought it would be good to consider some of the common arguments and evaluate them in a fair amount of detail.

However I thought it may be helpful to post some basic introductory notes.

What is the definition of international trade?

International trade is the exchange of goods and services across borders.

Why does international trade matter?

For a number of reasons,

1-      International trade is hugely significant in shaping the way we live our lives. (I am struggling to think of an aspect of my life which is not affected by international trade. It affects the jobs we have, what goods we consume, where we go on holiday, what music we listen to even what we eat.)

2-      International trade is also extremely controversial. Some people blame it for job-losses, cultural homogeneity (that means we all go to Starbuck and eat McDonalds), environmental degradation, increasing inequality and the erosion of the state.

3-      Other economists argue that international trade has led to the greatest advance in welfare in history; improving living standards, pulling people out of poverty and generally making the lives of most people better

4-      It’s on your syllabus!

How long has it been going on?

International trade has always occurred to a greater or lesser extent, but it is really in the 20th century and even more so in the last 30 years that international trade has really exploded. Take a look at the graph below which tracks the value of goods and services being traded as a % of global GDP.

This increase in international trade is the cornerstone of what is called Globalization. Globalization is the economic and, corresponding social and cultural, integration of countries around the world.  

What are the patterns of trade and how are they changing?

The patterns of trade inevitably change over time as countries specialize into certain products while others may decline in importance.  For example, South America used to be a major trading partner of Europe, it then went through a period of economic decline became less relevant and has recently been remerging as major trading partner. Even more significant has been China. China historically dominated global trade patterns, by the mid 20th century though it was almost completely isolated and was associated with only the tiniest percentage of global, but today it has become the world’s largest exporter of manufactured goods. So, things don’t stand still, but there are trends.

Historically nearly all international trade was between wealthy countries. (For example, the UK selling textile to America and America selling the UK sugar and tobacco.) Over time this changed and we started to buy an increasing quantity of our basic goods and raw materials from developing economies. But, until very recently, trade was still dominated by rich countries selling to other rich countries and buying only a limited range of products from poorer countries. In the last few years the developing economies, led by China, are becoming increasingly important in terms of global trade patterns and they are also increasingly trading with each other.

We can also see trends within countries. As a country develops it will often start by trading basic goods such as agricultural products. As it develops further its moves into more refined processed products and basic manufacturing. If it continues up the development ladder it will then start trading higher-end manufacturing jobs and services before becoming increasingly service orientated.


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