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Nations are almost always better off when they buy and sell from one another
If there is a point on which most economists agree, it is that trade among nations makes the world better off. Yet international trade can be one of the most contentious of political issues, both domestically and between governments.
When a firm or an individual buys a good or a service produced more cheaply abroad, living standards in both countries increase. There are other reasons consumers and firms buy abroad that also make them better off— the product may better fit their needs than similar domestic offerings or it may not be available domestically. In any case, the foreign producer also benefits by making more sales than it could selling solely in its own market and by earning foreign exchange (currency) that can be used by itself or others in the country to purchase foreign-made products.
Still, even if societies as a whole gain when countries trade, not every individual or company is better off. When a firm buys a foreign product because it is cheaper, it benefits—but the (more costly) domestic producer loses a sale. Usually, however, the buyer gains more than the domestic seller loses. Except in cases in which the costs of production do not include such social costs as pollution, the world is better off when countries import products that are produced more efficiently in other countries.
Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular
Even a country that is more efficient (has absolute advantage) in everything it makes would benefit from trade. Consider an example:
Country A: One hour of labor can produce either three kilograms of steel or two shirts. Country B: One hour of labor can produce either one kilogram of steel or one shirt.
Country A is more efficient in both products. Now suppose Country B offers to sell Country A two shirts in exchange for 2.5 kilograms of steel.
To produce these additional two shirts, Country B diverts two hours of work from producing (two kilograms) steel. Country A diverts one hour of work from producing (two) shirts. It uses that hour of work to instead produce three additional kilograms of steel.
Overall, the same number of shirts is produced: Country A produces two fewer shirts, but Country B produces two additional shirts. However, more steel is now produced than before: Country A produces three additional kilograms of steel, while Country B reduces its steel output by two kilograms. The extra kilogram of steel is a measure of the gains from trade.
Indeed, economic models used to assess the impact of trade typically neglect influences involving technology transfer and pro- competitive forces such as the expansion of product varieties.
WHY TRADE REFORM IS DIFFICULT
Trade contributes to global efficiency. When a country opens up to trade, capital and labor shift toward industries in which they are used more efficiently. That movement provides society a higher level of economic welfare. However, these effects are only part of the story.
Trade also brings dislocation to those firms and industries that cannot cut it. Firms that face difficult adjustment because of more efficient foreign producers often lobby against trade. So do their workers. They often seek barriers such as import taxes (called tariffs) and quotas to raise the price or limit the availability of imports. Processors may try to restrict the exportation of raw materials to depress artificially the price of their own inputs. By contrast, the benefits of trade are spread diffusely and its beneficiaries often do not recognize how trade benefits them. As a result, opponents are often quite effective in discussions about trade.
Many countries have substantial barriers to trade in services in areas such as transportation, communications, and, often, the financial sector, while others have policies that welcome foreign competition.
Reforms since World War II have substantially reduced government-imposed trade barriers. But policies to protect domestic industries vary. Tariffs are much higher in certain sectors (such as agriculture and clothing) and among certain country groups (such as less developed countries) than in others.
Moreover, trade barriers affect some countries more than others. Often hardest hit are less developed countries, whose exports are concentrated in low-skill, labor-intensive products that industrialized countries often protect. The United States, for example, is reported to collect about 15 cents in tariff revenue for each $1 of imports from Bangladesh (Elliott, 2009), compared with one cent for each $1 of imports from some major western European countries. Yet imports of a particular product from Bangladesh face the same or lower tariffs than do similarly classified products imported from western Europe. Although the tariffs on Bangladesh items in the United States may be a dramatic example, World Bank economists calculated that exporters from low-income countries face barriers on average half again greater than those faced by the exports of major industrialized countries (Kee, Nicita, and Olarreaga, 2006).
Differences in comparative advantage may arise for several reasons. In the early 20th century, Swedish economists Eli Heckscher and Bertil Ohlin identified the role of labor and capital, so-called factor endowments, as a determinant of advantage.
The World Trade Organization (WTO) referees international trade. Agreements devised since 1948 by its 153 members (of the WTO and its predecessor General Agreement on Trade and Tariffs) promote nondiscrimination and facilitate further liberalization in nearly all areas of commerce, including tariffs, subsidies, customs valuation and procedures, trade and investment in service sectors, and intellectual property. Commitments under these agreements are enforced through a powerful and carefully crafted dispute settlement process.
Under the rules-based international trading system centered in the WTO, trade policies have become more stable, more transparent, and more open. And the WTO is a key reason why the global financial crisis did not spark widespread protectionism. However, as seen most recently with the Doha Round of WTO trade negotiations, the institution faces big challenges in reaching agreements to open global trade further. Despite successes, restrictive and discriminatory trade policies remain common. Addressing them could yield hundreds of billions of dollars in annual global benefits. But narrow interests have sought to delay and dilute further multilateral reforms. A focus on the greater good, together with ways to help the relatively few that may be adversely affected, can help to deliver a fairer and economica