INTRODUCTION TO INTERNATIONAL TRADE

No country is completely self-sufficient. No country can produce all products it needs, nor is blessed with all natural resources necessary to maintain its economic growth. The resulting interdependence of nations is becoming more important as the world economy is being globalized and businesses are expanding their markets beyond their countries' borders.

Import is a business activity that brings foreign goods and services into the country where the business is located. On the other hand, export is a business activity sending goods and services beyond a nation's border. Import and export are also called international trade or foreign trade.

1. Classical theories of International trade

(1) Mercantilism

Mercantilism advocates more exports and fewer imports. A nation becomes richer and more powerful when it exports more than it imports. The trade balance between imports and exports is settled by precious metals such as gold and silver. The more precious metals a country accumulates, the more prosperous it becomes. However, not all nations can have a trade surplus for the same time period, since a nation's surplus is another nation's deficit. This theory was popular among European countries during the sixteenth to eighteenth century. While promoting exports, countries raised trade barriers to discourage imports that resulted in reduced international trade after all.

Nowadays no country admits it is implementing the mercantilism as its trade policy. More often, it is used when a country accuses other country which exports a lot but imports much less with import restrictions.

(2) absolute advantage

In 1776 Adam Smith of Great Britain published the book entitled An Inquiry into the Nature and Causes of the Wealth of Nations . In this book, he proclaimed that a country's wealth consists of the goods and services available to its citizens rather than gold and silver. He denounced mercantilism and advocated free trade.

To increase the wealth of nations, instead of producing all items a country needs, it should produce and export goods at an absolute advantage, and import goods at an absolute disadvantage. The international specialization in production would result in more outputs to all trading partners.

Some countries have a 'Natural Advantage' at some products due to climate and natural resources such as Saudi Arabia in petroleum. Other countries have an 'Acquired Advantage' at other products due to product and process technology such as Japan in electronic goods.

Let's assume that the countries of Mexico and the U.S.A. each have 100 resources available for producing tomatoes and beans. In producing 1 ton of tomatoes, Mexico uses 4 units of resource and the U.S.A. uses 10 units of resource. In producing 1 ton of beans, Mexico uses 20 units of resource and the U.S.A. uses 2 units of resource.

Mexico USA

Resources available 100 100
To produce 1 ton of tomatoes 4 10
To produce 1 ton of beans 20 2

When each uses half of its resources (50) per product without trade

Mexico USA Total Total

Tomato production 12.5 5 = 17.5 tons
Bean production 2.5 25 = 27.5 tons

When each uses all its resources (100) only for product at an absolute advantage

Mexico USA Total Total

Tomato production 25 0 = 25 tons
Bean production 0 50 = 50 tons

It is more beneficial that the USA produces only beans at an absolute advantage using all 100 resources, while Mexico produces only tomatoes at an absolute advantage using all 100 resources.

Then, one country exports a product it produces and imports a product it does not produce.

(3) Comparative Advantage

In 1817 David Ricardo expanded the Absolute Advantage Theory of Adam Smith. He declared in his book On the Principles of Political Economy and Taxation that even when a country does have or does not have an absolute advantage on all of its products, trade gains can occur if the country specializes in the production and export of products at a comparative advantage which is a greater advantage than other products, and imports products for which the advantage is less. The reason is that a country must give up less efficient production in order to allocate more resources to more efficient production due to limited resources. The comparative advantage theory has been a basis for export-oriented economic development of less developed countries.

Mexico USA

Resources available 100 100
To produce 1 ton of tomatoes 2 10
To produce 1 ton of beans 4 8

When each uses half of resources (50) per product without trade

Mexico USA Total

Tomato production 25.00 5.00 = 30.00 tons
Bean production 12.50 6.25 = 18.75 tons

When Mexico produces tomatoes and USA beans only and trade

Mexico USA Total

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