Trade patterns, comparative advantage, and arguments for trade restrictions

¶ … international trade the theories of absolute and comparative advantage are important. The concept of absolute advantage is seen in the trade theories of Adam Smith, originally published in 1776, where it was argued that countries should produce the goods that they can create with the lowest total costs (Smith, 1994). A country has an absolute advantage if they are able to produce a good at the lowest overall cost compared to other nations. In this model nations should export goods they produce at the lowest cost and import those goods that have the highest overall cost to produce (the absolute disadvantage) (Smith, 1994). In this way nations use their resources to optimize production. The concept of absolute advantage is a good starting point to assess who trade takes place in the international environment, but it is also too simplistic. Trade is more complex, with many countries producing goods which do not reflect an absolute advantage. To explain this, the concept of comparative advantage may be considered.

The concept of comparative advantage can be found in the work of Ricardo, building on the theory of absolute advantage however, there is major difference; Ricardo stated nations should produce commodities which have the smallest absolute disadvantage; those with the lowest opportunity cost. Absolute advantage may explain a small amount of international trade, but with many countries trading many of the same goods absolute advantage is limited. However, all nations will be able to identify goods and services where they have the lowest opportunity costs; which may explain why many countries may export similar goods and the way trade patterns take place. Examples may include the shift of manufacturing to the third world where there are lower wage costs and overheads, coffee from South America and technology from Japan. Therefore, comparative advantage offers the best examination of trade.

Question 2

Trade restrictions are seen where free trade is limited, usually where a country limits or prevents goods from other countries being imported, or in some cases prevents exports to other countries. In most cases trade restrictions will be taken as a protective measure, to support nations own industry against the arrival of cheaper imports. Where cheaper goods are brought into the country the demand from the nations own producers, who are more expensive, will reduce. In turn this will have the potential to create a negative cycle, with less demand for home produced goods, the companies will reduce their supply and employment will fall. This can increase unemployment and reduce disposable income in a country, having a negative knock on effect on the economy. This was the fear behind many textile imports into western nations which resulted in the cotton fiber agreement. It may be argued that in these circumstances short-term restriction may be justified, to facilitate the avoidance of economic shock while an economy adapts. It may also be argued where there is the use of trade tariffs this may have the same impact, as well as raising tax funds or government.