International Trade: Need, Benefits and Disadvantages

Let us make an in-depth study of the need, benefits and disadvantages of international trade.

Need for International Trade:

In today’s global economy, international trade is at the heart of development. Nations—developed or underdeveloped—trade with each other because trade is mutually beneficial. In other words, the basic motivation of trade is the gain or benefit that accrues to nations.

In a state of autarky or isolation, benefits of international division of labour do not flow between nations. It is advantageous for all the countries of the world to engage in international trade. However, the gains from trade can never be the same for all the trading nations. Thus, benefits or gains from trade may be inequitable; but what is true is that “some trade is better than no trade”.

There is, however, a strong debate around the role of trade in the development of mainly less developed countries. Historically, there was a consensus amongst many people that trade acts as an ‘engine of growth’ (in the 19th century and early 20th century). But in the 1950s, evidence showed that benefits of trade did not accrue to the LDCs; trade was beneficial to the developed countries only. Here this debate will be focused.

Benefits of Trade:

Virtually, every nation finds it advantageous to trade with other nations. They are linked to one another, in varying degrees, by trade flows and financial networks that surround the globe.

Benefits of trade are summarised here:

The major advantage of trade is that it enlarges the scope of trade. In other words, trade begets trade. Gains from trade accrue from specialisation, i.e., division of labour. Division of labour and specialisation within a country make necessary a greater amount of exchange, so greater division of labour necessitates an extension of trade. Specialisation is the logical offshoot of exchange among nations. Thus, a greater variety of products in larger quantities may be available.

This means that we have both ‘production gain’ and ‘consump­tion gain’. Every country produces maximum goods on the basis of comparative advantage. By exchanging these goods, nations can consume more than before trade. It was Adam Smith who first pointed out the advantages of trade in reaping the advantages of specialisation and the economic benefits flowing from it, viz., an improvement in production and productivity and, hence, national wealth/ income of every participating country.

Secondly, a similar gain from trade, called ‘vent for surplus’, has been illustrated by Adam Smith. International trade increases the level of productive activity by stimulating efficient utilisation of resources. Countries may then experience surplus produce. Smith then argued that trade was a means of disposing of surplus produce for exports. Thus, trade ‘vents’ a surplus productive activity that would otherwise go unsold in the absence of trade.

In the words of Samuelson, P.A. and Nordhaus, W.D. “Canadians could drink no wine, Ame­ricans could eat no bananas, and most of the world would be without jazz and Hollywood movies.”

Thirdly, there are three other kinds of gains from trade:

(i) those that remove the narrowness of domestic market, induce innovations, achieve the full advantages of economies of large scale production and increase productivity,

(ii) those that make savings and capital accumulation easier, and

(iii) those that acquire new knowledge, new ideas and cultures, new skills and entrepreneurship and disseminate technical knowledge.

Fourthly, empirical evidence suggests that trade can boost productivity which, in turn, raises the incomes and standards of living even of poor developing countries. The link between trade and productivity, being a potential one, can be identified with exports and imports. This is what makes trade a powerful ‘engine of growth’.

Finally, trade is not only considered as an important ‘engine of growth’, but it can also contribute to poverty alleviation by expanding markets, making larger investments in various fields, creating jobs, raising productivity which, in turn, raise incomes of the poor people.

For all these reasons, it is said that ‘trade is an engine of growth’. There is no reason for any country to remain in isolation.

Disadvantages of Trade:

The ‘trade engine’ theory lost its ‘fuel’ in the developing countries after the World War II. Some economists suggested that gains from trade can never be unambiguous for all the trading countries—both developed and developing. Thus, the message runs: free interna­tional trade is harmful for the poor developing countries.

Raul Prebisch, Hans Singer, Gunnar Myrdal argued in the 1950s that the gains from trade are biased—rich countries gain at the expense of the poor countries. Their arguments are as follows: Poor LDCs are, by nature, primary goods producing countries while rich countries are producers of manufactured articles.

Former buys manufactured goods from the latter countries by exporting their primary goods at low prices or at unfavourable terms of trade. Thus, these countries pay more to the developed countries for their imports while developed countries pay less to the developing countries for their imports. In other words, gains from trade largely accrue to the developed countries.

Secondly, some leftist economists argue that trade results in ‘dependent development’. In other words, trade between rich and poor nations is exploitative in nature. These economists argue that underdevelopment of poor countries is to be explained in terms of external factors, rather than internal factors. Historically, colonial countries of the past—say Asia, Africa and Latin America— did not have economic independence where

European capitalist imperialist powers ruled. From these colonies, capitalist countries drew their economic resources and filled their coffers simply by exploiting them. This is called ‘development of underdevelopment’ as a deliberate consequence of free international trade.

Danger of dependence is often explained in the following way. A country may face economic depression if its international trading partner suffers from it and then it spreads from one country to another. The Great Depression that emanated during 1929-30 in the US economy swept all over the world and all countries suffered badly even if their economies were not caught in the grip of Depression. Such overdependence becomes catastrophic during war.

Further, commercial rivalries resulting from trade may lead to war.