International Trade.

ROLCAM · Posted: Thu May 31, 2007 1:50 pm Post subject: International Trade.

International trade is the exchange of goods and services between countries. It is distinguished from domestic trade, which takes place entirely within a single country. International trade is sometimes called world trade or foreign trade.

International trade permits countries to specialize in producing those things they are best suited to make with the resources they have. Countries benefit by producing the goods they can make most cheaply, and buying those goods that other countries can make more cheaply. International trade makes it possible for more goods to be produced and for more human wants to be satisfied than if each country tried to produce everything it needed within its own borders.

By the mid-1990's, world trade, as measured by exports, amounted to more than $4 trillion a year. The world's leading exporting nations were the United States, Germany, Japan, France, and the United Kingdom. Most world trade is carried out by private exporters and importers, and only a small part is handled by governments.

The U.S. and world trade. The United States is one of the world's leading trading nations. Its thriving export trade helps the country achieve high levels of income and employment. The jobs of thousands of American workers, the profits of many businesses, and the incomes of many farmers depend on how U.S. products sell in other countries. About 40 percent of annual U.S. production of such agricultural commodities as cotton, soybeans, tobacco, and wheat is exported. Businesses producing computer equipment, aircraft, machinery, and other high-technology products also export much of their output.

Imports also aid the economy. Americans import many raw materials and foods which they cannot produce at all or in sufficient quantities. These include coffee, copper, iron ore, nickel, oil, and tea. Many goods can be produced more cheaply in other parts of the world. Americans can buy such imports at lower prices than if the goods were produced in the United States. And U.S. exports enable people in other countries to obtain these goods at lower prices.

International trade is a two-way process. For example, when Americans buy British goods, they supply the British with dollars that can be used to buy U.S. goods. If a country wishes to sell to other countries, it must also buy from other countries.

Why nations trade. Trade takes place between nations for the same reasons it is carried on within a country. For example, trade between Australia and Japan is similar to trade between Wyoming and Rhode Island. In both cases, regions specialize in producing certain goods because they have certain resources that make such specialization sensible and profitable. Both Australia and Wyoming have abundant space and few people. This is the best combination of resources for efficient cattle raising. Japan and Rhode Island have little space, but they have much skilled labor and capital. Such a combination makes for efficient industrial production. Australia and Wyoming specialize in cattle and sell meat to Japan and Rhode Island. On the other hand, Japan and Rhode Island specialize in industrial products and sell them to Australia and Wyoming.

Goods are bought and sold on the basis of their price. People want to buy the cheapest goods available. These goods will be made in nations that can produce them at low cost. For this reason, Japanese industrial goods will be priced lower than similar Australian products.

World trade benefits people in two chief ways. First, consumers can get more goods at lower cost through specialization and exchange than if every country tried to be self-sufficient and make everything it needed. Second, scarce resources can be used more efficiently if each nation mainly makes those things it can produce more efficiently than other countries. The economic principle of comparative advantage states that each country should concentrate on making those goods it can produce most efficiently and buy from other nations those goods it cannot make as efficiently.

The greatest volume of international trade takes place between the advanced industrial countries. This trading happens because many of the people in those countries earn enough money to purchase large amounts of goods, and because these countries have the most specialized industries. For example, the United States exports aircraft and computer equipment to Japan. In turn, the United States imports automobiles, stereo equipment, and color televisions from Japan.

Government trade policies influence the volume of trade between nations. In domestic trade, goods may move freely from one part of a nation to another. In international trade, governments often place artificial barriers against the free movement of goods from one country to another. One such barrier is the tariff, a system of import duties levied on goods coming into the country. The tariff makes these goods more expensive and thus encourages consumers to buy products from domestic firms. Another trade barrier, the quota, limits the quantity of imports allowed. It generally requires an importer to get a government permit before bringing goods into the country. The practice of establishing trade barriers to help domestic firms is sometimes referred to as protectionism.

Trade barriers usually reduce the volume of international trade, raise prices to consumers, and deprive nations of the benefits of specialization. However, all nations create such barriers for several reasons. Local producers and workers, unable to compete with more efficient producers in other countries, put pressure on their governments to protect them from foreign competition. Also, in some cases, countries prefer not to be dependent on foreign sources in the event of war. They often protect industries considered vital to their national interest, even though the goods could be obtained more cheaply from other countries in peacetime.

Less developed countries impose trade barriers to promote industrial growth rather than remain dependent on agriculture or mining. They protect their "infant industries" from the established ones of more advanced nations, because they believe that industry is the key to modern technology and social institutions, and even military power. In the early 1800's, the United States followed such a policy. Such countries as Australia, Brazil, and Mexico follow this type of policy today.

On trade policy, the countries of the world now fall into three groups. These are (1) the non-Communist industrialized nations, (2) the developing nations, and (3) the Communist countries.

The industrialized nations of the West are reducing their barriers to international trade. For example, the countries of Europe that make up the European Union have eliminated tariffs on one another's goods. The United States has been lowering its tariff since the mid-1930's, through agreements with other countries. See EUROPEAN UNION; RECIPROCAL TRADE AGREEMENT.

Many of the developing nations of Latin America, Asia, and Africa are using trade barriers to promote industrial growth. Until the late 1980's, the Communist countries carried on all trade through state trading monopolies. As Communism has been extensively revised or abandoned, state control of trade has been partly or completely removed.

Various international organizations cooperate in world trade matters. For example, the Organization for Economic Cooperation and Development (OECD) was designed largely to aid economic growth in its member countries. Its members include Canada, Mexico, the United States, Japan, and most of the nations of Western Europe. The United Nations Conference on Trade and Development (UNCTAD) deals mainly with the problems of less developed countries. The World Trade Organization (WTO) works to promote trade throughout the world. It administers the General Agreement on Tariffs and Trade and other international trade agreements. See GENERAL AGREEMENT ON TARIFFS AND TRADE.

Financing international trade. Different countries have different monetary systems. Therefore, importers must be able to exchange their own money for the money of the country from which they are buying the goods. For example, a New York importer who buys goods from a London exporter may have to pay the exporter in British pounds. The New York importer's bank can get the pounds in the foreign exchange market where foreign money is bought and sold. The price of one currency in terms of another currency is known as the foreign exchange rate.

Most countries keep records of their transactions with other nations. This record is called the balance of payments. Besides exports and imports, the balance of payments includes such items as foreign aid, business investments abroad, the income from these investments, and the money spent by tourists. If a country pays out more to other countries than it receives from them, it has a deficit in its balance of payments.

In the 1960's, the United States had large deficits in its balance of payments. The nation settled its deficits partly by sending gold to other nations and partly by going into debt to them. The debt took the form of other nations holding dollars which could be cashed in for gold. Because the United States let other nations exchange dollars for gold at a fixed price, the dollar was officially "as good as gold." But United States gold reserves continued to fall. In 1971, the United States government stopped exchanging gold for dollars held by other nations. Because there was an excess supply of dollars being held in foreign nations, the dollar was allowed to depreciate by about 8 percent in 1971 and by 10 percent in 1973. In the mid-1970's, huge increases in the price of oil caused balance-of-payments problems for many countries.

Many of the oil-importing countries, particularly the less developed ones, had large deficits. A sharp rise in interest rates in the United States after 1980 attracted a large inflow of foreign capital, which caused the dollar to appreciate. This development, in turn, greatly increased United States imports and limited the growth of U.S. exports. As a result, the United States suffered record trade deficits.
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Roland Camilleri

Moderator

Sydney , Australia.