International Trade: Benefits, Drawbacks, and Global Inequality

Introduction to International Trade Theory

Ever since Adam Smith demonstrated in The Wealth of Nations (1776) that individuals would be better off if they specialize rather than trying to be economically self-sufficient, countries across the world have tried to apply the same principle to international trade. It is argued that all countries would be better off if they exchange the products and services that they are relatively good at producing for those things that other countries are relatively better at producing. David Ricardo (1772–1823), British economist and businessman, through his theory of Comparative Advantage went on to "prove" that it can be beneficial for two countries to trade even if one of them is able to produce each item more cheaply than the other.

The colonialist powers, particularly Britain, had recognized the benefits of international trade after the Industrial Revolution, although it is highly debatable whether such trade was equally beneficial for the colonies. In recent decades, international monetary institutions such as the IMF and trade organizations, particularly the World Trade Organization (WTO), have been at the forefront of promoting free international trade. Unrestricted international trade has been touted as a panacea for all economic ills and an agent of development. The results of international trade have, however, been mixed. While supporters of free trade point to several success stories such as China, others point to the growing inequality, economic shocks such as the Asian Economic Crisis of 1997, and increasing poverty in Sub-Saharan Africa as negative consequences of increased international trade — also known as globalization.

This paper examines the pros and cons of international trade in order to determine whether increased international trade is beneficial or detrimental for the world. It also attempts to analyze how the existing problems in international trade can be overcome so that a greater cross-section of the global population can benefit from increased trade.

Apart from Adam Smith's theory of specialization and David Ricardo's theory of comparative advantage — which enable countries to devote their natural, human, industrial, and financial resources to their best uses — there are other reasons why increased international trade is considered beneficial. Open markets and increased international trade give people around the world greater freedom of choice, fulfilling a basic human requirement of independence and freedom. Moreover, exposure to international markets is a strong stimulant for improvements in efficiency and the transfer of technology, including better management techniques, to less developed countries. Export-oriented jobs tend to pay more, thus raising general living standards, while rising living standards in less developed countries create new markets for the goods of developed countries. All of these factors combined, at least in theory, should prove beneficial to all.

The Case for Free Trade: Growth and Prosperity

Unprecedented growth in communications and information technology over recent decades has brought the peoples of the world closer than ever before. This "information revolution" coincided with the collapse of Communism in the Soviet Union and Eastern Europe and the promotion of the market economy in China. Increased international trade in such an environment was, perhaps, inevitable. As a result, the volume of world trade has expanded to over $7 trillion annually, representing a 16-fold increase in worldwide trade since 1950.

Supporters of increased international trade attribute this growth to a six-fold rise in global GDP during the corresponding period (Nordstrom and Vaughan, 1999). Moreover, in the quarter-century between 1975 and 2000, Foreign Direct Investment (FDI) grew from $14 billion to $350 billion per year. According to the proponents of free trade and the "trickle-down" economic theory, such increases have resulted in a significant reduction in poverty around the world over the last fifty years.

Several studies extol the virtues of free international trade, arguing that it shifts a country's resources into those goods and services in which its workers are most productive. According to a study reported by Daniel Mitchell of the Heritage Foundation, during the 1970s and 1980s, developing open economies — those with relatively free trade, such as Chile and South Korea — grew on average by 4.5%, while closed economies with restrictive trade policies, such as India and Cuba, grew by only 0.7%. Another statistical study, based on a review of 123 nations, found that every percentage-point increase in total imports and exports leads to a 0.34% increase in per capita income (Vogel, 2000).

Proponents of free international trade also point to China, which embarked on a path of trade liberalization in 1978. In the following twenty years, its imports and exports grew from $21 billion to $324 billion, and the country's per capita income increased by more than 8% per year during the same period. India, by contrast, continued to follow protectionist policies, with high tariffs and restrictions on foreign investment, and its growth rate remained very sluggish until it adopted economic liberalization policy in the second half of the 1990s (Ibid.).

The benefits of free trade are most vividly reflected in the economic success of the United States. Soon after its establishment in 1789, the U.S. Constitution prohibited states from restricting trade with one another. This single measure helped create a large and efficient domestic market that soon made the United States one of the world's richest economies. Not all U.S. states are self-sufficient in everything: those with favorable weather conditions and rich soil produce the bulk of food, while others are more efficient producers of industrial goods. All states benefit by trading among themselves without trade barriers. The same principle of free trade applies between countries, and all countries that participate can benefit economically, just as U.S. states have benefited from trading among themselves.

More recently, the unprecedented growth of the U.S. economy during the 1990s can also be attributed to increased international trade and globalization. Between 1980 and 1998, U.S. exports increased from $272 billion to $934 billion, and imports grew from $292 billion to $1,100 billion (Ibid.).

The Disadvantages of Free Trade Policies

Opponents of free-trade laissez-faire policies and the trickle-down economic theory vigorously oppose these "globalization" policies, as is evident in the widespread demonstrations at WTO meetings. The opponents of the WTO's free-trade policies assert that they unfairly favor corporations at the expense of consumers, workers, and the environment. They also argue that these policies are heavily tilted against the poorest sections of the world's population and have contributed to increasing poverty and inequality.

According to anti-globalization theorists, policymaking in organizations such as the WTO, the IMF, the World Bank, and the OECD is dominated by corporate interests and adheres to a neo-liberal, free-trade agenda (Moore, 1999, Part I). These centralized bureaucracies are largely staffed by private bankers and corporate employees who prioritize the interests of the elite. In a post-communist world, any opposition to the free-market, unregulated laissez-faire economy is derided and dismissed. The WTO wields great authority through free-trade treaties; the IMF wields similar power by attaching conditions to the loans it grants; and the OECD serves as a global elite think-tank. Together, the three organizations have become an all-powerful unofficial world government that comes at the expense of the sovereignty of individual governments (Ibid.).

The nineteenth century saw the unfettered adoption of Adam Smith's laissez-faire economics — minus the "guiding hand" — by the United States and most other Western countries, particularly Britain. Information and communications technology was not as well developed then as it is today, so the resulting international trade was far less extensive. The outcome, however, was the era of the "robber barons," naked exploitation of workers by industrialists, and repeated boom-and-bust cycles. The severe global economic depression of the 1930s was the logical outcome of runaway capitalism without necessary regulations. This was followed by a period of greater government controls and social security programs, lasting until the 1980s, during which the Bretton Woods institutions provided the "guiding hand" for the global economy. Under pressure from powerful multinational corporations (MNCs), that guiding hand began to weaken in the 1970s. President Nixon took the United States off the gold standard, floated exchange rates, and control of international finance shifted from elected governments to private banks, investors, and speculators (Moore, 1999, Part I).

Margaret Thatcher's policies in Great Britain and President Reagan's "Reaganomics" in the United States accelerated a reversal to the laissez-faire policies of the nineteenth century. The difference was that this time the reach of free-market policies was global, and their results correspondingly magnified. Privatization, deregulation, and economic reform became buzzwords around the world, resulting in an accelerated transfer of assets, revenues, and power from elected governments to corporations.

Conclusion and Recommendations

Unprecedented development in communication and information technologies in recent decades, as well as the eclipse of Communism, has given a great boost to international trade. Most statistics and analysis show that the countries and people involved in trade benefit, and that increased international trade leads to prosperity and development. However, such trade also gives rise to serious problems, including increasing inequality and rural poverty. Most of these problems are the result of trade rules that favor large corporations and wealthy nations.