Today we will talk about the effects of international trade in the economy of the countries that develop it, as well as the fundamentals on which this activity is based.
Importance of international trade
In this era of globalization that we are going through, it is increasingly important to maintain strong and efficient international relations that contribute to the political, commercial, economic and cultural development of nations.
There is no nation on the planet that can be considered self-sufficient by itself, and that does not need to be able to count on the support of other countries. Even the richest and most powerful nations require commercial and cultural exchanges to obtain the resources they lack.
In its beginnings, international trade began with the trafficking of spices, gold, silver and precious stones, goods that the great powers of the time lacked.
But it was with the advent of the industrial revolution, with its steam engines, evolved means of transportation, and methods of mass production, that the activity of commerce achieved a continental and intercontinental scale.
Just like effect of international trade structures, economic systems and industrial production methods were transformed in each country and in each existing economic area in the world.
This change not only occurred in the economic sphere but also in the political, social and cultural sphere of the peoples of the world.
With the appearance of international trade and its effects, international markets and collaboration between countries were born, both in their industrial production techniques and in the achievement and allocation of production resources, since each country concentrates on those activities in which it has relative advantages.
This concentration in the production of a good is what we know as specialization, in which the production of a good or service is increased, in which that country has a relative advantage, favoring the exchange with the other countries that intervene in the Comercial activity.
International Trade: Foundations and Effects
When we talk about effects of international trade, we necessarily have to explore the many advantages it provides to the countries that participate in it.
Advantages of specialization and trade
- The level of competition in internal markets is increased.
- The market is expanded with a greater availability of products in the interior of the country.
- The business economy is getting a boost, which will allow it to explore new business opportunities not yet exploited.
- Economic development from export activities.
- Transmission of production technologies.
- International trade stimulates competition in different markets, which forces companies to reduce costs and prices to adapt to this offer of goods and services.
The principle of comparative advantage and international trade
There is a basic principle on which all commercial activities are based, and that is the principle of comparative advantage.
According to this principle, countries will tend to concentrate their efforts on the production and export of those goods in which they have greater comparative advantages over other countries.
The result of this specialization is that all levels of world production, and consequently their ability to meet the needs of the population, in general, will be greater and more efficient than if each country tried to be more self-sufficient.
The absolute advantage in international trade
A country has an absolute advantage over other countries in the production of a good when it can produce more of that good, with the same resources, than its neighbors.
We could say that international trade could also be advantageous for a country if it were capable of producing all goods using fewer resources, in absolute terms, than its neighbors.
If you want more information about the advantages and disadvantages of international trade, be sure to read this article, full of valuable information on this subject.
Factor endowments and effects on their prices
As soon as comparatively free trade is instituted between countries with different factor endowments, commodity prices will show a tendency to level off.
This leveling will cause the price of factor services to begin to unify as well, that is to say that, due to the effects of free trade in articles, a tendency will begin to reduce ground rent, wages and interest, where due to the scarcity of the respective factors were high and will increase in countries where wages were low because of their abundance.
Rising opportunity costs
"The greater obtaining of a good in equal amounts requires giving up greater amounts of the alternative good" (Friedrich von Wieser).
This happens because all resources are not equally productive in different activities. Furthermore, its Production Frontier is concave with respect to the origin. Increasing opportunity costs arise because the resources or factors of production, that is, capital and labor, are not homogeneous, that is, not all units of the same factor are identical.
Nor are they used in the same proportion in the production of all commodities. That is, when the production of a commodity increases, resources are used that become less efficient or appropriate to produce it.
The real terms of trade (RRI)
The real terms of trade (RRI) is the resulting ratio between the price of exports and the price of imports of a country, all expressed in the same monetary unit.
The RRI seeks to reflect the position that a country has in international trade and how much it benefits from the sale of its products.
In this way, it is assumed that the higher the relative price of exports, the higher the RRI, and the country will obtain greater profits from foreign trade.
This implies that the products of this country are comparatively more valuable than those obtained from other countries through their imports.
How is the RRI calculated?
To calculate the real exchange ratio, we will follow the following steps:
- First: A price index of the country's exports is calculated for a certain period of time.
- Second: A price index of imports made by the country is calculated during the same period of time.
- Third: The RRI is calculated with the following formula: RRI = 100 x (Export Price Index / Import Price Index).
International equilibrium prices and the RRI
When in trade activities, countries import and export different goods, the RRI of each country will depend on the weighted price levels, between all exported goods and services, and all imported goods and services.
Trade and efficiency
An international market that produces in equilibrium achieves an efficient allocation of resources, which means that resources are allocated in the best possible way to maximize total welfare between consuming and producing countries.
The efficiency of international trade can be calculated by measuring trade gains using the concept of social surplus and its variations.
Social surplus can be attributed, in part, to consumers: Consumer surplus is the difference between the total utility we get from a good or service and its market price.
It can also be attributed in part to entrepreneurs: It is the difference between the amount of money the seller is willing to accept and what he receives when selling the merchandise at the market price.
Trade and distribution
Not all the social sectors of a country will be favored, in the short term, with the commercial opening and the process of specialization of production.
The State is responsible for explaining to the “alleged losers” the convenience of entering into a specialization process that, in principle, they will perceive as circumstantial damage.
Given that governments traditionally pay much more attention to the problem of unemployment in their country than to any other problem, surely the limitations introduced on imports will be much more common and frequent than the barriers introduced on exports.
Barriers to international trade
In order to understand the barriers to international trade, it must be taken into account that governments have the premise of promoting national employment, since acquiring products through imports, at more competitive prices, can put national companies and their positions at risk. of work.
Another intention lies in the desire to promote new industries in those developing countries. And, finally, barriers to foreign trade can also be used as a measure of pressure on other countries to achieve a certain objective.
We know that the trend is moving towards the disappearance of obstacles to international trade, but we are still far from reaching free international trade, and there are still many measures aimed at hindering international trade.
Among them we can point out:
- Tariff rates: Import taxes.
- Establishment of quotas, that is, maximum import quantities of some good.
- Foreign exchange controls.
- Require new import licenses or authorizations.
- Embargo or prohibition of importation of certain goods.
- Export taxes.
Economic effects of the existence of tariffs or quotas
One of the biggest challenges facing the world economy is the possibility that some countries will compete for export markets through artificially low prices.
The entities in charge, on certain occasions, put certain proposals on the table, to establish import tariffs; this in order to counteract some supposed advantages in prices, in addition to also exerting pressure on other countries, so that they change their policies.
These effects of international tradeAlthough they have negative connotations, both for companies and citizens, they come from a legitimate concern of governments to protect their country's industries.
Effects of tariffs
- It increases the cost price of the imported product, making it equal to the price of domestically produced products.
- The reduction in the number of imports and the decline in consumer surplus.
- The price of the production value is reduced and balanced with international prices.
Effects of import quotas
- Prices trending upwards.
- Boosting national production.
- Negative effects on large companies.
Effects of foreign trade: Customs unions
Customs unions are based on the elimination of tariff barriers in a region, in order to stimulate investments that seek to take advantage of the expanded market and face increased competition.
This largely favors business activity in the region, thanks to the appearance of investments from abroad, in an attempt to avoid the discriminatory practices that the region maintains with the rest of the world.
These customs unions also have a positive impact on commercial unification and the increase in business competitiveness, bringing benefits, both within the region: lower prices for consumers and higher incomes for companies, and for the rest of the world. , that is, the spillover effect.
Preferential Trade Agreements: Types
We speak of a preferential trade agreement, when there is a mutual tariff reduction pact between two or more countries. That is, a country reduces or eliminates tariff barriers to another country, or group of countries, which in turn also reduce one or more tariffs.
Preferential agreements do not necessarily have to affect all goods or services. The objective of this type of agreement is to promote bilateral trade between those who sign the agreement, and can be limited to a product or a list of goods.
Free trade zones or areas
It is a place where a commercial agreement has been carried out between two or more countries, which is based on the elimination of commercial barriers within that area, which normally delimits the countries participating in the agreement.
Within the different levels of economic integration between countries, the free trade area is considered one of the initial or basic states. This elimination of trade barriers (such as tariffs, for example) is proof of this.
customs unions
As we have already said, these are based on the elimination of tariff barriers in a region, in order to stimulate investments that seek to take advantage of the expanded market and face increased competition.
common markets
A common market is a treaty that involves two or more countries, which come together in order to ensure the free movement and exchange of goods, services and factors of production between their borders.
In a common market, all the member countries agree to eliminate the existing tariff barriers, as well as the limitations on the movement of people, investments or commercial activities and the obstacles to the formation of companies.
Similarly, political and economic agreements are established for all, aimed at stimulating growth and common development of all members.
Static Effects of Customs Unions
Amongst the effects of international trade, the static effects of customs unions generate changes in production, consumption, trade volume and price relationships.
Static effects have been the subject of careful study by economists, as they can create or divert trade.
Trade is created by reducing trade barriers between two or more countries, whether they form a free trade area or a customs union, it will lead to increased trade flows between them.
However, there is also the danger of diverting trade due to the discrimination established between producers from member countries of the integration area and non-participating producers.
Dynamic effects of Customs Unions
The dynamic effects of the creation of a Customs Union are given by the variations that, over time, will occur in growth and development.
These effects mean a series of advantages for the participating countries that, for the most part, will arise from the emergence of economies of scale, the stimulation of competition and the incentive for research projects.
All of the above can accelerate the rate of economic growth in the region and of trade activities between the members of the customs union.
Protectionism in international trade
Protectionism is an economic policy that seeks to protect the production and jobs of a country by imposing conditions or tariffs on imported goods, causing their costs to rise to make them less competitive compared to those produced in the country.
The application of protectionist measures directly affects competition, that is, the direct relationship between supply and demand. Protectionism can be considered another of the effects of international trade.
In recent years, and in the context of an increasingly globalized world that rejects protectionism as a minority trend, a somewhat more conservative response has emerged, with preferably non-tariff measures such as subsidies for domestic production, called neoprotectionism.
If you want more information about the history and effects of international trade, do not stop watching the following video.