International Trade: Benefits, Consequences and Drawbacks

This paper aims to investigate the growth of international trade by highlighting its benefits, consequences and possible drawbacks. The study is divided into three sections. The first one explores the theoretical foundation of international trade through a review of classical and modern theories of global business. The second section demonstrates the extent of global economic growth attributed to international trade. Lastly, this paper explores the limitations of free trade agreements to understand the extent to which international trade could be beneficial or harmful to different nations.

Theoretical Examination of International Trade

Classical Theories of International Trade

There are three classical theories of international trade: mercantilism, absolute advantage, and comparative advantage. Adam Smith developed the theory of mercantilism in his book The Wealth of Nations (Walter 2013). It postulates that countries should support the growth of exports and discourage the expansion of imports. This principle is supported by the need for nations to have a favourable balance of trade to promote economic growth (Cypher 2014). The problem with this theory is that the basic structure of international trade is based on the premise that some countries will export goods and services, while others will import the same. Therefore, if all countries were to implement the principles of the mercantile theory, no nation will be willing to import, thereby defeating the purpose of international trade in the first place.

The second classical theory of international trade is the theory of absolute advantage. Adam Smith also supported it in 1776 (Walter 2013). It encouraged countries to focus on producing goods that they could manufacture efficiently (Seretis & Tsaliki 2015). The main criticism of this theory is the assumption that labour is the only factor of production. However, contemporary economic principles show that there are multiple factors of production, such as capital, land, and raw materials (Peet & Hartwick 2015). The theory of absolute advantage only focuses on labour and neglects the rest. Therefore, it is incapable of effectively assessing the complexities of international trade, relative to the complexity of factors that support it.

The third classical theory of international trade is comparative advantage. David Ricardo proposed it in the early 1800s when he said that international trade will work best in situations where one country had a comparative advantage in the production of goods and services (as opposed to absolute advantage) over her neighbours (Self & Becker 2016). The main criticism of this theory is its assumption that labour is the only factor of production. At the same time, it is effective to global trade if only two countries are analysed. However, today, international trade involves multiple countries with different comparative and absolute advantages.

Modern Theories of International Trade

Modern theories of international trade were developed to account for some of the weaknesses of classical theories of trade described above. The Bertil Ohlin Model is one such modern theory. It postulates that international trade should be understood within the context of resource differences between nations (Deb & Basu 2013). In other words, it argues that global trade is defined by the interaction between resource-rich countries and those that have the technology to exploit the resources. The implication of this theory is that it encourages countries to focus on producing goods and services that could be generated through the exploitation of available resources. One limitation of the Ohlin Model is its overemphasis on the relative factor price, which gives undue attention to supply-side factors of international trade while neglecting demand-side factors of global commerce (Dassler 2015). The focus on resources, as the basis for international trade exchanges, is also criticized in the same manner because factor endowment is only one aspect of the global trade. Therefore, the theory presents a shallow understanding of international trade.

Lastly, Michael Porter’s theory of competitive advantage is the last modern theory of international trade in this paper. It highlights four main stages in the evolution of a country’s participation in global trade: development based on factors, development based on investments, development based on innovation, and development based on prosperity (IEC 2017). This theory argues that different factors influence the success or failure of countries in international trade (Swords 2013). These determinants of success revolve around the ability of nations to develop internal capacities to exploit the opportunities posed by international trade; to recognize the specificity of the markets they operate in; to understand the links between associated industries, and to overcome the challenges of operating in a competitive environment (Self & Becker 2016). Figure 1 below explains the relationship between these factors and their link to the creation of competitive advantage in global commerce.

Porter’s Theory.
Figure 1. Porter’s Theory (IEC 2017).

The biggest criticism of the aforementioned theory is that it only relates to multinational companies (MNCs) (Byers 2017). In other words, it was developed at a time when “big business” was influential. However, with the breakdown of many barriers to trade, these competitive advantages have significantly declined in power and influence.

Extent of Growth Based on International Trade

In the last three or four decades, international trade has grown substantially and affected the global economy in ways not previously understood (The European Commission 2017). The international trading theory postulates that countries will still benefit from international trade through the growth of different economic indices, including an increase in real income and gross domestic product (GDP) (The European Commission 2017). However, some critics have argued the contrary. They claim that global trade has left some countries and communities worse off than they were before participating in international business (Destradi 2016). This section of the paper demonstrates that international trade has led to a real income growth and prosperity in many nations, contrary to what critics of international trade claim. The evidence appears below.

Boost Development and Reduce Poverty

International trade has helped many developing nations to improve their economic positions by boosting development and reducing poverty. These outcomes have been achieved through the proliferation of economic/commercial opportunities in the global marketplace and through the growth of investments in the same. Particularly, some studies have shown that global trade has helped developing countries to broaden their production through private sector development (Destradi 2016). The European Commission (2017) has provided evidence of this growth by showing how developing nations have increased their GDP per capita from $325 to $625 between the year 2000 and 2008. Much of this growth has been attributed to the development of global trade and the increase of foreign direct investments (FDI) in these countries.

Improved Competitiveness

International trade has also helped both developed and developing countries to improve their business environment and, by extension, the well-being of their citizens through increased competitiveness (Bhawsar & Chattopadhyay 2015). It has done so by helping the same countries to reduce the cost of their inputs and acquire financing through investments. Additionally, countries have enhanced their value addition processes using the same model, thereby moving up the value chain ladder. Evidence of improved competitiveness has been reported in several emerging economies including South Africa, Brazil, China, and India, which attribute most of their standard of living gains to global trade (Bhawsar & Chattopadhyay 2015). Between 2000 and 2010, most G20 developing countries reported a GDP increase of 115% because of their participation in international trade (The European Commission 2017).

Creation of Employment Opportunities and Higher Incomes

International trade has also been associated with per capita income growth in many countries because it leads to the creation of employment opportunities (Artuso & McLarney 2015). These advantages are realized through the expansion of economic sectors that create stable jobs for citizens who would have otherwise been unemployed. This economic revolution often results in higher incomes, thus improving livelihoods. Evidence of this growth has been witnessed in the manufacturing sector where workers in countries that actively engage in international trade receive pay rates that are three to nine times greater than those who work in closed economies that are conservative about international trade. For example, in Chile, Mineworkers who work for companies that trade their goods in the global market earn €1,100 more annually compared to those who work for companies that do not sell their goods internationally (The European Commission 2017).

Implications of Free Trade and Liberalization of Economies

Based on the findings highlighted in section two above, international economic experts believe that international trade should stimulate the global economy through income growth and improved cohesion between states that are willing to collaborate with each other in business (Cassell & Lee 2016). Some international and regional commercial bodies, such as the World Trade Organisation (WTO), North American Free Trade Agreement (NAFTA), European Union (EU), and the Association of Southeast Asian Nations (ASEAN) have been on the forefront in championing this growth. However, their activities have been hindered by some protectionism policies from some member states and rival regional bodies. This last section of the paper explores some potential limitations and drawbacks in the pursuit of free trade policies.

Limitations of Free Trade

As highlighted by classical theories of absolute advantage and absolute competitive advantage, labour is considered a significant factor of production in international trade. However, the abuse of human rights in pursuit of profit has reemerged in the wake of the growth of international trade because there have been many instances of multinational companies abating child abuse, sexual abuse (among other practices) in pursuit of profit (Vadlamannati 2014). This drawback of free trade has prompted some critics to oppose the unregulated growth of international trade practices.

Another limitation of free trade is the excessive power wielded by multinational organisations in the international arena. Particularly, the repatriation of profits from poor nations to rich countries is a serious issue that has dominated discussions about international trade (Furåker 2017). Global commerce has made it easier for many MNCs to relocate from wealthy nations to developing countries. As explained by the Bertil Ohlin Model, these companies often exploit natural resources in their host countries and make huge profits from the same. However, they often send their profits back to their home countries, thereby making it difficult for the host (developing) countries to benefit from their business activities. This concern has led some governments to restrict the activities of MNCs in their countries (Broome, Homolar & Kranke 2017). Thus, there have been several cases of protectionism, which have been voiced as a solution to the “excesses” of international trade.

Supporting Protectionism

Based on the concerns highlighted above, there are legitimate cases of protectionism that should govern free trade agreements. Particularly, free trade agreements that lead to the abuse of workers, environmental degradation, and the abuse of human rights should be restricted because they are unethical. This concern is partly addressed by Van der Waal and De Koster (2017) who say international trade encourages poor countries to participate in some retrogressive economic policies in what they call “a race to the bottom.” The WTO and the International Labour Organisation (ILO) (among other global bodies) have been unable to stop such practices because there is opposition from countries that profit from such practices (Dadush 2018). Furthermore, their involvement in local processes has been bordering on undermining the sovereignty of independent states. Although global organisations are still debating on how to address these issues, the existence of abusive practices in international trade explains why protectionism may be needed as the trade grows.

Conclusion

This paper shows that international trade has many benefits to offer to countries that embrace it. However, participating nations partake in it knowing that there are consequences and limitations of the trade. The classical and modern theories of global trade highlighted in this paper support free trade by showing the logic behind it; however, they fail to demonstrate the drawbacks of the same. The last section of this paper highlights them and argues for the need for protectionism in cases where international trade leads to human rights abuses, child abuse and such vices. Nonetheless, international trade could be beneficial to all parties involved if undertaken ethically.

Reference List

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