the-benefits-and-costs-of-trade

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The Economic Benefits of Trade

Free trade is the movement of goods and services across borders without barriers to trade
- There are no or limited taxes, quotas, subsidies, regulations on the trade of goods or services

Greater choice: with access to a wider variety of goods/services, the standard of living improves
Lower prices: As the amount of competition increases, firms benefit from economies of scale, causing costs to fall and consumers benefit in the form of lower prices
International cooperation: required for trade helps countries build better relationships, which leads to lower levels of hostilities
Flow of new ideas: innovative ideas and technology can be shared between countries
Access to resources: output can increase and costs of production can fall with increased access to raw materials
Increased efficiency: international competition allows the most efficient firms to emerge and this improves the use of global resources
Economic growth: exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth
Economic development: Increased output leads to lower levels of unemployment, which leads to higher incomes and a higher standard of living

International trade countries increases the choice of goods and services
- However, this trade may favour more economically developed countries and and exploit less economically developed countries
- The following outlines the costs associated with international trade for countries

The Costs of International Trade

Disadvantage	Explanation
Deficit on the current account	Some countries will import more than they export, resulting in a deficit on the current account on [popover id=”vSuJtzgqI3Miukkl” label=”Balance of Payments”] In developing countries, this situation is usually the result of a lack of global competitiveness and involves importing necessity products
Unemployment	Employment in successful industries will increase, and employment in unsuccessful industries will decrease Structural unemployment is a particular concern. Government supply-side policies make a significant difference to the length and severity of structural unemployment
Over-specialisation	Developing countries often lack the finance to develop a diversified product base and end up over-specialising in commodity products This makes the country’s GDP very dependent on commodity prices
Loss of sovereignty	With an increase in trade, languages and cultures have blended, impacting on some indigenous languages and cultures Countries have also lost some sovereignty as they are more easily influenced by dominant trading partners
External shocks	Shocks to other economies have a knock-on effect due to the interdependence that develops with trade E.g. the Russian war on Ukraine has created global shockwaves in the energy & grain markets

Disadvantage

Explanation

Deficit on the current account

Some countries will import more than they export, resulting in a deficit on the current account on [popover id=”vSuJtzgqI3Miukkl” label=”Balance of Payments”]
In developing countries, this situation is usually the result of a lack of global competitiveness and involves importing necessity products

Unemployment

Employment in successful industries will increase, and employment in unsuccessful industries will decrease
Structural unemployment is a particular concern. Government supply-side policies make a significant difference to the length and severity of structural unemployment

Over-specialisation

Developing countries often lack the finance to develop a diversified product base and end up over-specialising in commodity products
This makes the country’s GDP very dependent on commodity prices

Loss of sovereignty

With an increase in trade, languages and cultures have blended, impacting on some indigenous languages and cultures
Countries have also lost some sovereignty as they are more easily influenced by dominant trading partners

External shocks

Shocks to other economies have a knock-on effect due to the interdependence that develops with trade
E.g. the Russian war on Ukraine has created global shockwaves in the energy & grain markets

Numerous factors influence the pattern of trade between the UK and the rest of the world e.g. Brexit has resulted in a fundamental change to the trading relationship with the EU
Patterns of trade can change significantly over time
- Up until the 1980s, the UK mainly traded with Commonwealth Countries
- In 2020, 46% of trade was with EU countries and 26% was with the USA

Comparative advantage: As firms seek to profit maximise they increase production due to natural advantages. When it makes financial sense to outsource production because another country does it better/cheaper. Over time, this changes what countries produce & trade
Impact of emerging economies: Emerging world economies like China, Brazil, India & Thailand have obtained a much higher share of the global business which means that other countries are losing out as trading relationships
Growth of trading blocs & bilateral trading agreements: By December of 2016, the World Trade Organisation (WTO) had helped to facilitate more than 420 regional trading blocs & bilateral agreements (between 2 countries)
Changes in relative exchange rates: If a country’s exchange rate appreciates, then its exports are relatively more expensive & its imports become cheaper. This means that changes to the exchange rates influence the patterns of trade over time as goods/services either become cheaper or more expensive in relation to the price of goods/services in other countries