International trade

International trade is the exchange of capital, goods and services between countries. Along with international finance it forms the larger branch of international economics. Although research on international trade has been carried out since the start of the study of the economic science, its importance over history has never been as great as over the last 50 or 70 years. The globalization phenomenon is both a consequence and a cause of international trade.

International trade studies which countries engage in trading amongst each other, why they do so, what goods they exchange, analyses the benefits and costs of it and reasons and effects of government policies that limit or promote international trade. The main economic theories or models that try to explain all determinants of international trade are:

-Adam Smith’s, developed in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” 1776, also known as the absolute advantage explanation, which considers what countries can produce more efficiently;

-The classical, or Ricardian trade theory, (developed by Ricardo in his book “On the Principles of Political Economy and Taxation”, 1817) which considered relative costs across countries the determinant factor which explained trade patterns, using comparative advantage as the reason why countries trade with each other;

-The neoclassical theory, which even though simultaneously considers countries differences in technology and factor endowment, also emphasizes in the importance of tastes across countries: even if technology and factor endowment were equal across two countries, tastes differences would still explain trade between them;

-The Heckscher-Ohlin theory, developed by Eli Heckscher and Bertil Ohlin, according to which the factor endowments of different countries determines in what product does the country specialize its production and, subsequently, its trade patterns;

-The new trade theory, according to which economies of scale and network effects are the core explanation of international trade patterns, as Paul Krugman’s trade model suggests (developed in his article “Increasing Returns, Monopolistic Competition, and International Trade”, 1978).

Even though these theories and models use different reasoning to analyse and explain trade patterns, there is a common idea throughout international trade literature that exchange amongst countries is beneficial from a normative point of view. Indeed, international trade, and therefore globalization, is not a zero-sum game, but has positive effects on social welfare and consumers’ surplus. Even though globalization can cause some job outsourcing to foreign countries, or demand for goods and services shifting from one country to another, it is beneficial for the group of countries trading, as a whole. A good and easy way to see this is using the Ricardian trade model, or analysing the effect of tariffs on consumers and producers’ surpluses.