In a global economy, no nation is self-sufficient, which is associated with specific flows of goods, people, and information. Each nation is involved at different levels in trade to sell what it produces, to acquire what it lacks, and to produce more efficiently in some economic sectors than its trade partners. International trade, or long-distance trade since there were no nations in the modern sense, has taken place for centuries. It is an important part of human economic and cultural history as ancient trade routes such as the Silk Road can testify and has occurred at an ever-increasing scale over the last 600 years. Trade now plays an even more active part in the economic life of nations and regions, but it should be taking place only if there is a benefit for the partners involved. International trade is an expansion of the market (or exchange) principle at a scale beyond the region or the nation.
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.g. free trade zones), which confers additional advantages to the factors of production. 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.
Based on a nation (or a firm) able to produce more effectively in an economic sector while using fewer resources (e.g. capital, labor) than any other potential competitors. 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.
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.
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.
Trade can have both positive and negative effects on the environment
Economic growth resulting from trade expansion can have an obvious direct impact on the environment by increasing pollution or degrading natural resources. In addition, trade liberalisation may lead to specialisation in pollution-intensive activities in some countries if environmental policy stringency differs across countries the so-called pollution haven hypothesis.
However, increased trade can in turn, by supporting economic growth, development, and social welfare, contribute to a greater capacity to manage the environment more effectively. More importantly, open markets can improve access to new technologies that make local production processes more efficient by diminishing the use of inputs such as energy, water, and other environmentally harmful substances.
Similarly, trade and investment liberalisation can provide firms with incentives to adopt more stringent environmental standards. As a country becomes more integrated within the world economy, its export sector becomes more exposed to environmental requirements imposed by the leading importers. Changes needed to meet these requirements, in turn, flow backwards along the supply chain, stimulating the use of cleaner production processes and technologies.
Consequences from climate change can disrupt trade
Direct consequences of climate change on trade could come from more frequent extreme weather events and rising sea levels. Supply, transport and distribution chains infrastructure are likely to become more vulnerable to disruptions due to climate change. Maritime shipping, which accounts for around 80% of global trade by volume, could experience negative consequences, for instance from more frequent port closures due to extreme events. More importantly, climate change is expected to decrease the productivity of all production factors (i.e. labor, capital and land), which will ultimately result in output losses and a decrease in the volume of global trade.
At the same time, there could also be positive economic impacts on maritime shipping through the potential further opening of Arctic shipping routes, albeit at the cost of environmental degradation.
Imports and Exports
A product that is sold to the global market is called an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in the current account section in a country’s balance of payments.
Global trade allows wealthy countries to use their resources for example, labor, technology, or capital more efficiently. Different countries are endowed with different assets and natural resources: land, labor, capital, and technology, etc. This allows some countries to produce the same good more efficiently in other words, more quickly and at lower cost. Therefore, they may sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain it by trading with another country that can. This is known as specialization in international trade.
For example, England and Portugal have historically both benefited by specializing and trading according to their comparative advantages. Portugal has plentiful vineyards and can make wine at a low cost, while England is able to more cheaply manufacture cloth given its pastures are full of sheep. Each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate domestically in favor of engaging in trade. Indeed, over time, England stopped producing wine, and Portugal stopped manufacturing cloth. Both countries saw that it was to their advantage to stop their efforts at producing these items at home and, instead, to trade with each other in order to acquire them.