Skip to content Author: Dr. Jean-Paul Rodrigue International trade is an exchange of goods or services across national jurisdictions. The Flows of Globalization In a global economy, no nation is self-sufficient, which is associated with specific flows of goods, people, and information. However, the benefits of trade can be subject to contention with several theoretical foundations of international trade have been articulated to explain its rationale: Mercantilism.
A trading system where a nation tried to impose a positive trade balance more exports than imports, particularly value-wise on other nations to favor the accumulation of wealth.
This system was prevalent during the colonial era and often undertaken by charter companies receiving a monopoly on trade. Mercantilism represents the antithesis of free trade since trade relations are controlled and aligned to benefit one partner at the expense of others, implying that what can be traded, the conditions and the partners involved are regulated.
Still, mercantilism established the foundations of a global trading system, albeit an unequal one. A more recent trade system, which like mercantilism, leans on establishing a positive trade balance to meet economic development goals. Export-oriented strategies can be considered a form of neomercantilism, particularly if a government puts forward an incentive and subsidy system e.
Neomercantilism can also be a response by some governments to the competitive and disruptive consequences of free trade, particularly if the trade partners are engaged in neo-mercantilist strategies. The outcomes are tariff and non-tariff measures regulating trade and protecting national commercial sectors that are perceived to be subject to unfair competition.
Therefore, neo-mercantilist strategies can be controversial and subject to contention. Absolute advantages. Based on a nation or a firm able to produce more effectively in an economic sector while using fewer resources e. It, therefore, has an absolute advantage. Global efficiency can thus be improved with trade as a nation can focus on its absolute advantages, trade its surplus, and import what it lacks. The drawback of this perspective is that, in theory, nations having no absolute advantages should not be involved in trading since they may have little to gain from it.
Absolute advantages tend to be an enduring characteristic , particularly for resources such as energy, where large producers keep an advantage as long as a resource is available or has a market. Comparative advantages. Even if a nation or a firm has absolute advantages over a wide array of economic sectors, it can focus on the sectors it has the highest comparative advantages the difference of its production costs and those of its competitors and import goods in sectors it has less comparative advantages.
The comparative productivity increases the total production level since even if a nation or a firm has no absolute advantages, it can focus on sectors where the total productivity gains are the most significant.
Comparative advantage can also be the outcome of economies of scale applied to a product or sector where the resulting lower costs provide competitiveness. Comparative advantages tend to be a temporary characteristic , that can change with the evolution of labor costs and technology. Factor endowments. Expands the perspective of the comparative advantages by underlining that trade is related to the factor endowments of a nation.
The most basic endowments are capital, land, and labor. A nation will export goods to which it has notable factor endowments and import goods in which it has scarce factor endowments. As such, nations that have low-cost labor available will focus on labor-intensive activities, while nations having high capital endowments will focus on capital intensive activities. Factor endowments can be improved through capital and human resources investments.
The Setting of the Contemporary Global Trade System International trade, both in terms of value and tonnage, has been a growing trend in the global economy. The emergence of the current structure of global trade can mainly be articulated within three major phases : First phase immobile factors of production. Concerns a conventional perspective on international trade that prevailed until the s, where factors of production were much less mobile. Prior to the end of World War I, global trade was mainly structured by colonial relations but was fairly unregulated.
There was a limited level of mobility of raw materials, parts, and finished products. Developments in transport technology in the shipping and rail sectors allowed for greater volumes and distances to be covered. After World War I, international trade became fairly regulated with impediments such as tariffs, quotas, and limitations to foreign ownership. Trade mainly concerned a range of specific products, namely commodities and very few services that were not readily available in regional economies.
Due to regulations, protectionism, and relatively high transportation costs, trade remained limited and delayed by inefficient freight distribution. It was challenging to coordinate production and distribution.
In this context, trade was more an exercise to cope with scarcity than to promote economic efficiency. Second phase mobility of factors of production.
From the s to the s, the mobility of factors of production, particularly capital, became possible. The legal and physical environment in which international trade was taking place leads to a better realization of the comparative advantages of specific locations. In addition, containerization provided the capabilities to support more complex, and long-distance trade flows, as did the growing air traffic. Due to high production legacy costs in old industrial regions, activities that were labor-intensive were gradually relocated to lower costs locations; offshoring.
The process began as a national one, then went to nearby countries when possible and afterward became a truly global phenomenon.
Thus, foreign direct investments surged, particularly towards new manufacturing regions, as multinational corporations became increasingly flexible in the global positioning of their assets. The trade of finished and intermediate goods surged. Third phase global value chains.
There is a growth in international trade, now including a wide variety of services that were previously fixed to regional markets and a surge in the mobility of the factors of production.
Since these trends are well established, the priority is now shifting to the geographical and functional integration of production, distribution, and consumption with the emergence of global value chains. Complex networks involving flows of information, commodities, parts, and finished goods have been set, which in turn demands a high level of command of logistics and freight distribution. In such an environment, powerful actors have emerged which are not directly involved in the function of production and retailing, but mainly taking the responsibility of managing the web of flows.
International trade becomes increasingly supported by digital technologies allowing for more efficient transactions, compliance to regulations and the management of the transportation and logistics assets supporting trade. Trade Costs and Facilitation The facilitation of trade involves how the procedures regulating the international movements of goods can be improved so that actors involved in international trade have move efficient formalities.
These trade costs are derived from two main sources: Separation factors. These are usually exogenous factors separating two trade partners, such as distance, transportation costs, travel time, as well as common attributes shared by trade partners. These usually involve being part of an economic agreement e. Country specific factors. Relates endogenous to factors that are either related to the origin or the destination of trade. This usually involves customs procedures tariffs and non-tariff , the overall performance of the national transport and logistics sector, and how well an economy is connected to the international transport system through its gateways mostly ports and airports.
Many factors have been conductive to trade facilitation in recent decades, including integration processes, standardization, production systems, transport efficiency, and transactional efficiency: Integration processes , such as the emergence of economic blocks and the decrease of tariffs at a global scale through agreements , promoted trade as regulatory regimes were harmonized. One straightforward measure of integration relates to custom delays , which can be a significant trade impediment since it adds uncertainty in supply chain management.
The higher the level of economic integration, the more likely the concerned elements are to trade. International trade has consequently been facilitated by a set of factors linked with growing levels of economic integration , the outcome of processes such as the European Union or the North American Free Trade Agreement. The transactional capacity is consequently facilitated with the development of transportation networks and the adjustment of trade flows that follows increased integration.
Integration processes have also taken place at the local scale with the creation of free zones where an area is given a different governance structure in order to promote trade, particularly export-oriented activities. In this case, the integration process is not uniform, as only a portion of an area is involved. China is a salient example of the far-reaching impacts of the setting of special economic zones operating under a different regulatory regime.
Standardization concerns the setting of a common and ubiquitous frame of reference over information and physical flows. Standards facilitate trade since those abiding by them benefit from reliable, interoperable, and compatible goods and services, which often results in lower production, distribution, and maintenance costs.
Measurement units were among the first globally accepted standards metric system , and the development of information technologies eventually led to common operating and telecommunication systems. It is, however, the container that is considered to be the most significant international standard for trade facilitation.
By offering a load unit that can be handled by any mode and terminal with the proper equipment, access to international trade is improved. Production systems are more flexible and embedded. It is effectively productive to maintain a network of geographically diversified inputs, which favors exchanges of commodities, parts, and services. Information technologies have played a role by facilitating transactions and the management of complex business operations. Foreign direct investments are commonly linked with the globalization of production as corporations invest abroad in search of lower production costs and new markets.
China is a leading example of such a process, which went on par with the growing availability of goods and services that can be traded on the global market. Selling a product to an overseas market can extend the life of an existing product as emerging markets seek to buy American products. When trading internationally, it may be a general practice to ask for payment upfront, whereas at home you may have to be more creative in managing cash flow while waiting to be paid.
Expanding your business overseas could help you manage cash flow better. One of the significant advantages of international trade is market diversification. Focusing only on the domestic market may expose you to increased risk from downturns in the economy, political factors, environmental events and other risk factors.
Becoming less dependent on a single market may help you mitigate potential risks in your core market. Those who add international trade to their portfolio may also benefit from currency fluctuations.
For example, when the U. You can also benefit from currency conversion. Let's say you do business in Japan and the Japanese yen is strong against the U. Your company's profits from Japan will be in yen. When you convert the payments in yen against a weak dollar, that means more dollars for your American head office—a welcome boost to your bottom line. This alone could be one of the most valuable advantages of international trade.
Another one of the advantages of international trade is that you may be able to leverage export financing. Small Business Administration may be places to explore for export financing options. One of the advantages of international trade is that you may have an outlet to dispose of surplus goods that you're unable to sell in your home market.
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