International Trade between Countries

The economic transactions that are made between countries with the use of money as a medium of exchange are called international trade. The common items that are traded are consumer goods. The purpose of international trade is to facilitate countries with a lack of commodities or other items. To reduce the poverty of a country the international trade can become one of the major contributors. However, international trade allows countries with strong international trade to become rich and they can have the capacity to control the global economy.

The countries having international trade allows them to develop their markets and also allows them to gain access to goods and services that may not be available locally. The market is more competitive than the previous time because of international trade. As a result of the competitive pricing, the customers are now able to consume a cheaper product or good.

This journal will investigate the extent that whether the developed countries only get benefited from international trading or not. Our insight is that, because of cyclical fluctuations of international trade volumes, state interference to the countries' international trade, and various trade barriers between countries affect the economic benefit of international trade. We use a basic standard economy model with assumed data to find the beneficiaries from international trade and the result is that the developed economies are more beneficial from trade than the under-developed economies. However, it cannot be said that international trade is a modern way to suppress the poor and under-developed countries.

Understanding International Trade

In this era of globalization, international trade is vital to the progression of globalization. The government of most countries has increasingly opened their economies to international trade over the centuries, whether through the multilateral trading system, increased regional cooperation, or as part of domestic reform programs. Generally, globalization, as well as trade, have brought enormous benefits to nations and countries. The countries are getting benefits from specialization and economies to produce at a more effective scale and the benefits are a high level of productivity, the spread of knowledge and updated technologies, and most importantly the range of choices available to the consumers.

"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry." —Adam Smith, The Wealth of Nations

The theory of international trade

The international trade theory is different from the theory of trade. While trade is the notion of trading goods or services between two people or entities, international trade is the concept of exchanging goods or services between two countries.

The main reason for trading is that people or entities believe that they benefit from the trading or exchange. Though it sounds very simple, international trade includes a great deal of theory, policy, and business strategy.

“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A cooperative trade network…set the pattern that would endure for the next 6,000 years.”

Absolute Advantage

Absolute advantage is about the capability of a nation to make a good more economically and efficiently than another nation. It can be assumed theoretically that the USA and the BD have bilateral economic relations. The USA could make wheat cheaper or faster (or both) than the BD. Therefore, the USA had the advantage and could focus on specializing in producing wheat. Similarly, the BD was better at producing textile, it could focus on specialization as well. Countries would generate efficiencies by specializing in what they are good at because their labor force would become more skilled by doing the same tasks. Production would also become more efficient because there would be an incentive to create faster and better production methods to increase specialization.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at absolute productivity.

Let’s look at a simplified imaginary example to illustrate the subtle difference between these principles. Mr. Jaber is a High Court lawyer who charges BDT500 per hour for his legal services. It turns out that Mr. Jaber can also type faster than the administrative assistants in his office, who are paid BDT40 per hour. Even though Mr. Jaber has the absolute advantage in both skill sets, should he do both jobs? No. For every hour Mr. Jaber decides to type instead of doing legal work, he would be giving up BDT460 in income. His productivity and income will be highest if he specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Mr. Jaber. By having both Mr. Jaber and his assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is a comparative advantage. A person or a country will specialize in doing what they do relatively better.

Trade Liberalization and Economic Development of Poor countries

Both developed and developing countries have substantially reduced trade barriers in recent decades, triggering a rapid integration of world goods markets. Yet, while economists and policymakers have often touted trade liberalization as an attractive policy, it is not well understood whether the impact of trade liberalization depends on a country's level of economic development. This study investigates the extent to which international trade affects developed and developing countries differently.

Poor and underdeveloped countries usually contain a greater part of the population with lower income levels. The lifestyle of the population of underdeveloped countries is less expensive of rich countries. So, in those countries, it is very normal that labor costs will be lowest which will result in a lower production cost. Large companies from around the world will reach out to those countries for production, without giving a higher incentive to them. Although it helps to create employment, the benefits served to the poor countries are not up to the mark.

For the study, the research conducted by Fernando Leibovici and Jonas Crews on April 20, 2018, has been quoted. To identify trade liberalizations, they have measured the average import tariffs charged on a country's exports by each destination market. They used cross-country data from the World Bank, Organisation for Economic Co-operation and Development (OECD), and United Nations (U.N.) Comtrade over the period 1980-2006.

To illustrate their approach, the import tariffs on U.S. exports were considered. First, they have measured the average import tariffs charged by each country that imports U.S. goods. They then weighed the import tariffs by the share of aggregate U.S. exports imported by each country.

Next, they have identified episodes of trade liberalization based on a rapid decline in the average import tariffs on a country's exports. In particular, it was said that a country experiences a trade liberalization in a given year if the average import tariffs on its exports decline at least 0.75 percentage points over the subsequent three years.

Finally, they have classified countries into two groups based on their level of economic development in the trade liberalization year: (i) low-income countries, those with real GDP per capita (in 2011 U.S. dollars) below $5,000, and (ii) middle/upper-income countries, those with real GDP above that threshold.

Their research suggests that the impact and potential gains from trade liberalization may differ based on a country's level of economic development. They have speculated that financial underdevelopment, limited infrastructure, or limited human capital, among other characteristics, might hinder low-income countries and prevent them from scaling up production to sell internationally and take more rapid advantage of trade liberalization.

Trading might create a suppressive relationship between a developed and a poor or developing country. However, mostly the poor sector of the society suffers from it. When a foreign client asks for a price reduction, if the deal is inevitable the suppliers might feel it be imperative to reduce production costs. In this process, they may go for extreme measures like partially cutting salaries and incentives provided to their employees. This kind of suppression can be a common occurrence in poor countries where the population has a very low literacy rate.

However, by international trading, underdeveloped and poor countries feel relevant in the world economy. For the need of contribution, they thrive to develop their infrastructures, manpower, and relationship with other countries. Which leads to the overall positive development of their countries.

Evaluating a country’s International trade allows every country to specialize in whatever they are best at. The country, having a comparative advantage in producing a good should emphasize becoming a specialist in producing that good. Trading has always been a vital part of the world’s history of development. Even now, trading is continuously changing the world along with itself. Trading will always exist among countries of financial inequalities. Possibly, there are or will be places where suppression takes place. Although there is a criticism that international trade transfers income from the poor to the rich countries, however, it would not be correct to say that, ‘only developed countries get benefitted from trading and it is a modern way of suppressing poor and under-developed countries.’

References

1. Balassa, B., Allais, Maurice, Wonnacott, Paul, Robinson, Romney, and Bertrand, Trent J. (2020, November 11). International trade. Encyclopedia Britannica. https://www.britannica.com/topic/international-trade

2. Matt Ridley, “Humans: Why They Triumphed,” Wall Street Journal, May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html

3. Martin Meredith, The Fate of Africa (New York: Public Affairs, 2005).

4. Smith, A. (2002) The Wealth of Nations. Oxford, England: Bibliomania.com Ltd.

5. https://opentext.wsu.edu/cpim/chapter/2-1-international-trade/ Accessed on August 25, 2021.

6. Fernando Leibovici and Jonas Crews, "Trade Liberalization and Economic Development," Economic Synopses, No. 13, 2018. https://doi.org/10.20955/es.2018.13

7. Mankiw, N. G. (2008). Principles of microeconomics (5th ed.). CENGAGE Learning Custom Publishing.

8. Leibovici, F., Waugh, M.E., 2018; International Trade and Intertemporal Substitution, Federal Reserve Bank of St. Louis Working Paper 2017-004. URL https://doi.org/10.20955/wp.2017.004