International Trade leads to lower prices:
Another common argument put forward to support international trade is that it lowers the price of goods and services.
There are a number of reasons why international trade may lower prices:
1- International trade allows firms to take advantage of larger markets which means they can take advantage of greater economies of scale. These economies of scale allow firms to lower their costs which they can pass onto the consumer in the form of lower prices.
2- International trade also means firms face greater competition. This forces firms to improve their game; being more efficient, lowering costs, improving products and lowering prices. Prices should therefore be competed down.
3- The theory of comparative advantage and absolute advantage state that countries will increasingly specialize in those products that are most suitable to their resources endowments. What this basically means is that each country does what it is most suited to and this again leads to more efficiency and potentially lower prices.
If you combine all of the above you have some pretty strong forces working to bring prices down. So is there any reason why prices might stay high or even go up.
The above really depends on firms passing on the cost savings resulting from more specialization and economies of scale. Consumers will only experience the lower prices if these cost savings are past on and firms are only likely to pass these savings on if there is competition forcing them to do so.
If there are barriers to entry, monopoly power, collusion, or government intervention to restrict competition then firms will have little incentive to lower prices.
Free market economists tend to argue that competition will exist, or at least the threat of it will (contestable markets), and therefore firms will pass on their saving in lower prices.
Others will argue that the most likely outcome is that certain firms will start to gain monopoly power and just absorb the cost savings in the form of higher profits and consumer will see little or no benefit. Indeed if the monopoly power is significant then prices might go up.
I think the truth is somewhere in between these two views. Certain products certainly seem to get cheaper – electronics and clothes being two obvious examples. But at the same time they are not as cheap as they could be. Take this example of smart phones:
If you think about what you get for your money smartphones and the like are very cheap. But the evolution of the industry neatly exemplifies the upward and downward pressures on prices as a result of trade.
Firstly, international trade allows Apple to make the Ipad cheaply:
But the industry has quickly moved toward monopoly power which allows firms to keep price high:
And, while smartphones are incredibly cheap when you compare them to what you would have got for the same money 10 yrs ago, prices could certainly be lower: http://www.guardian.co.uk/technology/2012/apr/23/bad-apple-employ-more-us-workers
While obviously this is only one industry it is a good example.