International Trade: Benefits, Policies, and Barriers

International Trade

Most international trade is the trade of goods. International trade of services is growing fast. International trade is not a one-winner, one-loser game; both countries could benefit from international trade. Free trade makes it possible to have more goods than in autarky, employing the same amount of labor, thus increasing the real wage (salario real).

Differences Between Internal Trade and International Trade

More trade opportunities, different countries and different rules, and exchange rates.

Advantages

Variety of natural resources, different wants/tastes, and cost differences.

a) Absolute Advantage

When the quantity of labor required per unit of product is smaller than what is required by the potential commercial partner.

b) Comparative Advantage

When the quantity of labor required per unit of product is relatively smaller than what is required by the potential commercial partner. A country will specialize in the production of the good in which it is relatively more efficient (comparative advantage) and it will exchange it for the good in which it has a comparative disadvantage. [Graph 1].

Trade Policies

Autarky to Free International Trade

There are changes that affect the welfare (bienestar) of producers and consumers:

a) Import industry: Consumers gain, producers lose.

b) Export industry: Consumers lose, producers gain.

The affected firms and workers seek protection (tariffs and quotas). Production factors move to exporting industries (expanding).

Tariffs and Non-Tariff Barriers

Markets try to protect established trade barriers.

1) Tariffs

A tax on importing a good or service into a country, collected by customs officials at the place of entry.

• Specific tariff
• Ad valorem tariff
• Mixed tariffs

The prohibitive and non-prohibitive tariffs cause a government revenue.

2) Quota

A limit on the total quantity of imports allowed into a country each year. The prohibitive and non-prohibitive quotas cause extra gains which are for those having the legal right to import.

3) Effective Rate of Protection

Depends on the entire set of a nation's trade barriers.

Value added: Value of production minus the value of inputs (P-I).

Deadweight losses: Gains from international trade and specialization that are lost because of the tariff.