The Economic Basis for Trade

3 Key excerpts on "The Economic Basis for Trade"

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  eBook - ePub

  Economic Analysis and Law

  The Economics of the Courtroom

  • Christopher E.S. Warburton(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  As far as the trade rules are concerned, the GATT/WTO has made a valuable contribution over the years to greater stability, certainty and fairness in trade. But the rules are not perfect and there is always room for improvement. This is one reason why governments continue to negotiate and to seek out further mutually advantageous accommodation. Like trade liberalization, crafting better rules remains a work in progress.

  (WTR, 2007, p. iv)

  8.2 Trade theories as foundations of international trade law

  International economic laws are intricately related to the liberal exchange of goods and assets across international boundaries. That is, goods and financial assets are expected to be exchanged across international boundaries without undue or unfair restrictions that will imperil the welfare of business and consumers. Consequently, international economic laws must be evaluated against welfare effects and economic theories that articulate collective improvements on the welfare of nations. The bases and effects of international trade are probably the most important foundational concepts to understand the spirit and intent of international economic laws.

  The initial impulses suggested that international trade must be done to the peril of other nations. Essentially, the early proponents of international exchange believed that trade was a zero-sum game. Pointedly, nations can only gain at the expense of others, meaning that nations must impose restrictions on international exchange that will only be beneficial to their self-interests. The problem is that no nation will benefit if each and every nation behaves as such.

  The mercantilists were the first to experiment with the idea of restrictive exchange in order to amass national wealth for proprietary access to international markets and international dominance. The primitive trade theory, which was well received and propagated for many reasons, became fashionable in an era of aggression to acquire bullion (commodity money) and power.17

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  Microeconomics in Context

  • Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  6 By shifting production across countries to take advantage of low-cost resources, trade results in lower prices to consumers. Trade can promote economic growth in poor countries, as these countries can tap into consumer demand in richer countries.

  Going beyond our simple two-country model, we see that global trade creates an environment where production can shift relatively quickly in response to changing conditions. Suppose that after trading with England for some time, Portugal discovered that it could get more cloth (or other valuable goods) by growing table grapes for Germany than by producing wine for England. In a global system of unrestrained trade, Portugal would be motivated to move resources into producing the more highly valued product. Trade gives producers an economic incentive to produce the goods that command the highest market value, even if that value originates halfway around the world. Such an incentive therefore has the potential to encourage competition and innovation, to the ultimate benefit of many consumers.

  Another desirable consequence of free trade or exchange is technical. A production process is characterized by “economies of scale” (we’ll discuss this topic in more detail in Chapter 15 ) if the cost per unit of production falls as the volume of production rises. With trade, the volume of a country’s production of a good can be substantially higher than its internal (domestic) market can use, increasing the opportunity for economies of scale to be realized. A larger market means that goods can be produced more cheaply, a fact related to Smith’s earlier point about specialization.

  Trade can also encourage technology transfer across countries. Particularly when companies from technically advanced countries locate facilities in developing countries, new technologies can be introduced. For example, a 2014 paper concluded that expansion of manufacturing exports in India has resulted in increased access to foreign technologies that have produced increases in productivity.7

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  Economic Development and Environmental Protection: Economic Pursuit of Quality

  Economic Pursuit of Quality

  • Thomas Michael Power(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Clearly the location decisions of households have a very real impact on the location of economic activity. People do not just follow jobs. Economic activity, ultimately, must follow people, because they represent both the labor force and the market for products. This makes people’s locational preferences a central force in determining the geographic pattern of economic activity.

  9. Defining the Economic Base

  The economic-base model has one more intractable problem: specifying the basic economic activities. Without completing that step empirically, we have no explanation of anything. We have to be able to specify which economic activities are the “primary” activities that supposedly drive all others in the local economy.

  Often this problem is solved intuitively by simply specifying those industries which obviously produce for export: manufacturing, agriculture, and mining. To these are added “autonomous” inflows of income from federal spending, major construction projects, and income earned outside the local economy. All other economic activities, such as services, retail and wholesale trade, local construction, and local government, are labeled derivative or secondary.

  But this usually breaks down very quickly. Some manufacturing, agricultural, and mining production may well be for the local market, not for export. In addition, an area may be a regional trade center or tourist attraction, and part of the spending on services and retail and wholesale trade may not be local in origin. These industries may actually be part of the economic base.

  That means that all economic activities are partly basic and partly derivative. But how much of each? Two approaches have been taken to answering this question. One method assumes that all regions have similar consumption patterns per capita. National averages are used to establish how much of the dollar value of each good and service is “needed” to serve the local population. The value of all production in excess of this average is assumed to be exported and to be part of the economic base. Besides assuming that all areas have identical consumption patterns, this approach also assumes that all areas have identical productivity and that areas do not both export and import the same type of good or service. None of these are safe assumptions. Use of this approach has led to clearly spurious results (Gibson and Worden, 1981).

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