Benefits of international trade for countries

International Trade

The basis of modern theory on international trade is the theory of comparative advantage. Nations should produce goods in which they have a comparative advantage with other nations. The total goods produced will be greater, so both nations will benefit (Landsburg, 2007). This theory works well on paper, but in the real world it is subject to a wide range of distortions and externalities. That said, sufficiently free international trade still conveys the benefits of that Ricardo identified so long ago.

Free trade is the key concept. Ricardo's comparative advantage was illustrated based on a free trade model. Yet trade throughout most of the world is not free. This tends to obfuscate the advantages of free trade based on the principle of comparative advantage. When truly free trade is considered, we find that the benefits of specialization and trade are real.

Claims have been made at various times in the past that freer trade has failed to deliver benefits. Poor countries are still poor; Americans have lost ground. These arguments, though, do not hold up to scrutiny. When critics of international trade grew vocal, Paul Krugman (1996) shut them down by pointing out the errors in the facts that were underlying their arguments. He pointed out that American workers have not lost ground, and that while third world wages and working conditions may be appalling, they are better than the alternative, which is abject poverty.

In order to determine whether there is any merit at all to the contention that international trade is not beneficial, the objectives of international trade must be considered. The ultimate objective of trade is to raise the global economy. While basic comparative advantage models begin with two products, the web of global trade gives rise to specialization that allows clustered firms to product goods for the global marketplace. With specialization, nations will be able to focus their efforts on producing goods for export strictly on what they have a comparative advantage. As these goods are traded around the world, the global economy improves. In equilibrium, all nations will receive benefit roughly in order of their contribution. Critics of international trade point to outcomes on individual workers, and individual companies. Yet, achieving positive outcomes for every individual on the planet is not one of the objectives of international trade. When measured against its objectives -- increasing economies of nations -- we see that international trade has been effective.

When trade is not effective, it is largely due to external influences. Corruption, criminality, excessive taxation and government support of failing industries all contribute to a reduction in efficiency of the international trade model. Nations with high levels of these factors are invariably going to be left out of the benefits of trade, since they are not putting in to the world trading system either. Nations that open themselves up the world trade -- that is they are no longer focused on production for self-sufficiency -- are the ones that become economic success stories (Krugman, 1999).

Knowing that international trade is by definition a national-level issue does not stop people from pointing out its flaws. Protectionism arises from individual or national interest, or to protect infant industries. Each of these must be recognized, however, as a distortion in the trade system, a negative action undertaken to achieve a non-economic goal (Friedman & Friedman, 1997).

In the case of many countries, the benefits of international trade are negligible not because the money does not come into the country, but because the money is siphoned out of the economy before it can do any good. Corruption and other inefficiencies in a market can negate some of the benefits of international trade, before the citizens of the country see the benefit. In order that citizens see benefit, they must have low taxation rates, receive public goods from their governments, or receive jobs from their companies. In short, trade will put money into an economy, but it cannot dictate how that money is put to use.

Governments less oriented towards trade will tend to protect more industries and attempt to product more goods for domestic consumption. This approach perpetuates inefficiency. Some nations seem unsure about what they can produce, because they are fixated on their absolute disadvantages, rather than their comparative advantages. But by balking at trade, they are reducing the total economic output of the world, and by not putting into the system they are ensuring that they will get nothing out of it either.