THE INTERNATIONAL TRADE

A major source of economic growth and rising living standards throughout the world derives from specialization and division of labour. Reaping the gains from specialization requires trade among individuals, and trade among regions.

First, consider trade among individuals. If there were none, each person would have to be self-sufficient, producing all the food, clothing, medical services, entertainment and other things that he or she required. It does not take much imagina­tion to realize that living standards would be very low in such a self-sufficient world. Trade among individuals allows people to specialize in those activities they can do well, and to exchange their surpluses with other people, who specialize in different activities. Poor carpenters but good doctors can specialize in medicine, providing physician's services not only for themselves but also for good carpenters who have neither the training nor the talent for medicine. Thus, trade and specialization are inter­connected. With trade, everyone can specialize in what they do relatively well, and all can gain.

Exactly the same principle applies to regional specialization. Without interregional trade, each region would have to be self-sufficient, producing all the agricultural products, manufactur­ing goods and services that the people in the region require. With trade among regions, however, specialization is possible. Plain regions with suitable climates can specialize in growing grain crops, mountainous regions can specialize in timber and mining, cool regions can produce crops that thrive in temper­ate climates, hot regions can grow tropical crops such as coffee and bananas, regions with abundant power sources can special­ize in manufacturing, and so on. With trade, each region can concentrate its efforts on what it does relatively well. And with exchange among specializing regions, all regions can gain.

The British buy Volkswagens, the Germans take holidays in Italy, the Italians buy spices from Tanzania, the Arabs buy Japanese cameras, and the Japanese depend heavily on American soy-beans as a source of food. International trade refers to exchanges of goods and services that take place across national boundaries. It is of major importance in the modern world; it has been expanding very much faster than has world production.

International trade takes place because of differences in costs of production between countries, and because it increases the economic welfare of each country by widening the range of goods and services available for consumption. Differences in costs of production exist because countries are differently en­dowed with the resources required. Countries differ as to the type and quantity of raw materials within their borders, their climate, the skill and size of their labour force, and their stock of physical capital. Countries will tend to export those com­modities which production requires relatively more than other commodities of those resources which it has most.

There is a presumption that international trade should be free from restrictions. However many trade restrictions still remain. Governments intervene in international trade for eco­nomic and non-economic reasons. Such intervention is called protection. Some barriers to trade which hinder imports are tariffs and quotas. Taxes levied by the government on imports of particular goods are known as tariffs or import duties. A tariff may be either "specific", i.e. so much money per unit of the goods imported, or it may be "ad valorem", which is calculated as a percentage of the price of the product. Tariffs bring revenue to the government and give protection to domestic producers when raising the prices of imported goods relative to the prices of competing domestic products. Limiting the quantity of goods that are allowed into the country over a period of time is done through import quotas, which provide an upper limit to permit­ted imports over the given period.

There exist economic and non-economic arguments for protection. Among the non-economic arguments one might be to preserve a peasant farming community, even if it were inefficient. This could justify restrictions on the import of farm products which were obtainable more cheaply from other countries. A second example might be protection on grounds of national defence. It has been argued, for instance, that Britain needs an experienced merchant navy in case of war, and this industry should, therefore, be shielded from competition by more efficient foreign vessels, even in peace-time. A third example might be protection in order to diversity. A nation might have comparative cost advantages in a narrow range of commodities. The government, however, might decide that the risks of narrow specialization made the nation politically vulnerable. All these non-economic arguments may be acceptable, because life has other objectives as well as the maximization of real income per head of population.

At the same time there has been an increase in the number of customs unions and free-trade areas such as the European Community (EC), the European Free Trade Association, the Latin American Integration Association, and the Central American Com­mon Market. While these unions do establish free trade between member countries, they discriminate against outsiders. The de­veloping countries, in their attempt to achieve faster economic growth, are changing from being simply raw-material exporters to exporters of finished or semi-finished goods. At the same time the developed nations are taking advantage of technological spe­cialization, so that trade in high-value finished manufactures is increasing between them.

For the UK, trade now accounts for over a quarter of national output, and we must ask why countries engage in trade with each other, what they gain by doing so, and why obstacles are sometimes placed on international trade. Economists have long recognized that the principles governing the gains from inter­national trade are the same as those governing trade within a single country.

Although identical principles apply to international, inter­regional, and interpersonal trade, there are two characteristics that distinguish the first from the other two. They relate to mobility factor and to the existence of national currencies. Land is, of course, totally immobile, while labour is a great deal more mobile among regions than among countries, because of the existence of national frontiers. Not only many nations do have their own languages, they have different traditions and lifestyles, which impede mobility. For example, workers in Scot­land face much more severe adjustment problems if, in search of higher wages, they migrate to Switzerland than if they move to England. They not only need to understand one of the Swiss languages, they have to be prepared to change their diet rather drastically, not to mention legal restrictions on their mobility. Outside economic unions, such as the EC, many nations restrict the rights of foreigners to work in their countries.

Capital is highly mobile, and has become particularly so in recent years, as knowledge of world markets and the ability to communicate quickly and cheaply among them has risen. In the 1980s, for example, foreign direct investment grew at a much faster rate than did trade in goods and services. Trading nations mostly have their own currencies - dollars, pounds, yens etc. As a result, an extra element of uncertainty is involved for a firm exporting to another country, compared to exporting to another part of its own country. For example, a Welsh firm selling in England is paid in pounds sterling which are the currency unit in both Wales and England. But if it exports to the USA it will be paid in dollars, and there is an element of uncertainty about the rate at which dollars will exchange for pounds, when payment is received.