Chapter 34 - International trade Flashcards
What is the advantages and disadvantages of international trade for developed countries?
The advantages of international trade for developed countries are clear. Trade gives developed countries access to raw materials - natural resources that they do not have within their own boundaries. This was especially important in the early years of economic growth, when countries such as the UK were able to obtain key raw materials needed by the newly growing manufacturing sector. This may be less important in today’s world, but it remains significant.
International trade allows a widening of consumer choice, giving access to a wide range of commodities that could not readily be produced in the domestic market. In return, trade gives developed countries access to a wider market for their output.
Firms that operate in global markets may also be able to gain technical knowledge that enables an increase in productive efficiency. Building networks of suppliers and collaborators can be valuable in the long run. There are also disadvantages. Perhaps the most significant of these is that when countries become more closely integrated, they may become more susceptible to external shocks. An example was during the period of financial crisis in the late 2000s, when crisis spread rapidly between countries.
What is the advantages and disadvantages of international trade for emerging countries?
In many ways, emerging economies such as the BRICS (Brazil, Russia, India, China, South Africa) built their success on international trade. In earlier generations, the so-called ‘tiger’ economies (Hong Kong, Singapore, Taiwan and South Korea) also benefited greatly from economic growth that was fuelled by exports.
For economies trying to make the transition from less developed to developed, engaging with international trade is crucial. Without a large market for their products it is difficult to exploit economies of scale in production. Furthermore, international markets can provide capital goods and technical expertise that are important for an economy wanting to develop a manufacturing base.
The tiger economies went through a process of economic growth at a time when word trade was expanding rapidly, and when many of the advanced economies were moving into new economic activities - high value-added production and service sectors. This left a gap in the market that the tigers were able to fill.
In the case of China, the economy had been little exposed to international trade from the time of the revolution in 1949. With reforms introduced in 1979, China began to experience an unprecedented period of economic growth. At the beginning of this process, China’s GDP per capita was below that of countries such as Bangladesh or Sierra Leone. By 2016, GDP per capita in China was some 15 times higher than in Sierra Leone. Much of this success was built on expanding exports, taking advantage of China’s large supply of relatively low-cost labour to expand its manufacturing base.
Such heavy dependence on exports could create vulnerability. If there is a slowdown in world trade, such as happened in the financial crisis of the late 2000s, this could spread not only among the advanced economies but also to the emerging economies.
What is the advantages and disadvantages of international trade for developing countries?
It might be expected that developing countries would have the most to gain from international trade, but they seem to have benefited the least. For many developing countries, the size of the home market is relatively small. People are living on low incomes, so have limited spending power. Firms are therefore unable to grow to the size needed to exploit economies of scale. By gaining access to foreign markets, they might be able to overcome this.
Furthermore, developing countries lack the expertise to build capital goods or to take advantage of technical advances. Again, international trade could give access to machinery and technical expertise that could allow the development of industries. It would seem that developing countries could therefore gain much from engaging in international trade. Indeed, the World Bank and the IMF have encouraged developing countries to become more open to international trade.
Developing countries have not been able to tap into the potential gains from trade for a number of reasons. Their economies tend to be dominated by primary production, whether it be agriculture or mineral production. Agriculture in particular tends to be a low productivity activity, and prices of primary products are notoriously volatile and liable to fall over time relative to the prices of manufactured goods.
People in developing countries lack the skills needed for modern production, and firms that do try to enter world markets often find that they face more powerful and experienced foreign producers that will be able to compete strongly with any new entrants.
All of this means that developing countries find it difficult to gain entry to overseas markets.
