Exploring the Interdependence, Advantages and Disadvantages, of International Trade – By: Haleema Arif
International trade is based on the principle of global interdependence based on comparative advantage, where countries specialize in producing goods, cooperate with other for relative gains. Some countries are more efficient in producing particular goods than others. This efficiency isn’t just about using fewer resources, it is about choosing to produce what has a lower opportunity-cost compared to other nations. By focusing on their strengths and importing goods with lower opportunity-costs from others, countries can increase overall production and trade. This results in a greater quantity and variety of goods for all involved, enabling everyone to reap the benefit of international trade.
There are six basic reasons that makes trade an important element of international relations. First, it reduces the sheer dependance on the local market. Second, it increases competition in the marketplace. Third, it enhances productivity of nations. Fourth, it provides relative advantages over others. Fifth, it improves growth opportunities for countries. Sixth, it instills innovation.
For instance, Malaysia, the Philippines, Singapore, and Thailand exploit comparative and competitive advantages in international trade, particularly in sectors like electrical machinery. Indonesia, on the other hand, faces a comparative and competitive disadvantage in the same sector. In the agricultural sector, Turkey and several EU countries like Belgium, Bulgaria, Croatia, Italy, and Spain have a competitive advantage, while others like Austria, Cyprus, Germany, and Sweden face competitive disadvantages. Additionally, the ASEAN-4 countries, including Indonesia, the Philippines, Malaysia, and Thailand, have shown varying comparative advantages over the years, with each country specializing in different product classifications to maintain their competitiveness in international trade. These findings emphasize the importance of understanding comparative advantages to enhance trade competitiveness and economic growth.
Lord Thomas Macauley puts it, “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country, unpopular.”
Recent research on the International Monetary Fund (IMF) highlights that when trade barriers are reduced, it triggers adjustments not only across industries but also within them. This means that as foreign competition increases, there’s a squeeze on profits, pushing less-efficient firms to shrink, thus creating space for more efficient ones. Expansion and new entry introduce better technologies and new product varieties. Importantly, trade allows for a greater variety of goods to be available, exemplified by intra-industry trade, where countries might export household refrigerators while importing industrial coolers. These dynamics are often overlooked by traditional factor endowment approaches.
It is crucial to note a notable shift in the composition of global trade following the COVID-19 pandemic. Tensions continue to linger due to changes in both the types of products traded and the geographical focus of trade. Today, the rise of global value chains and the impact of multinational companies on trade and foreign capital flows are significant factors that influence international trade dynamics. Protectionist measures, including non-tariff barriers, have been on the rise, affecting trade relations and contributing to trade and political uncertainty across the globe. Challenges such as the crisis of the multilateral trade system, trade conflicts escalating to new stages, and the weakening of the multilateral system pose obstacles to the recovery and growth of global trade, requiring multilateral resolutions for sustainable progress.
Reforms since World War II have substantially reduced government-imposed trade barriers. But policies to protect domestic industries vary. Tariffs are much higher in certain sectors (such as agriculture and clothing manufacturing) and among certain country groups (such as less-developed countries). Many countries have substantial barriers to trade in services in areas such as transportation, communications, and the financial sector; others have policies that welcome foreign competition.
Moreover, trade barriers affect some countries more than others. The most affected nations are less-developed countries whose exports are primarily low-skilled, labor-intensive products that industrialized countries often protect. The United States, for example, is reported to collect about 15 cents in tariff revenue for each USD 1 worth of imports from Bangladesh (Elliott, 2009), compared with 1 cent for each USD 1 worth of imports from some major western European countries—even though imports of a particular product from Bangladesh face the same or a lower tariff than a similarly classified product imported from western Europe. World Bank economists calculated that exporters from low-income countries face barriers on average 50 percent higher than those of major industrialized countries (Kee, Nicita, and Olarreaga, 2006).
“People in the same trade seldom meet together, even for merriment and diversion, but the conversation ends in some contrivance to raise prices,” said Adam Smith, who firmly believed in the invisible hand of supply and demands in regulating the market.
In Pakistan’s case, trade openness and GDP per capita are positively correlated though the correlation remains at a meagre 0.008 from 2000 to 2019.According to World Bank Statistics, Pakistan had a total export of 28,795,179.09 in thousands of USD and total imports of 72,891,644.10 in thousands of USD leading to a negative trade balance of -44,096,465.01 in thousands of USD. The Effectively Applied Tariff Weighted Average (customs duty) for Pakistan is 9.03 percent and the Most Favored Nation (MFN) Weighted Average tariff is 9.90%.The trade growth is 14.43% compared to a world growth of 12.59 percent. GDP of Pakistan is 348,262,544,719.25 in current USD. Pakistan services export is 6,544,020,000 in BoP, current USD and services import is 10,587,126,000 in Bop, current USD. Pakistan exports of goods and services as percentage of GDP is 9.06 percent and imports of goods and services as percentage of GDP is 17.99 percent.
Indeed, international trade comes with its share of advantages and disadvantages, and it’s crucial to acknowledge the drawbacks. Particularly concerning is the adverse impact on the handicrafts and cottage industries of less developed countries, alongside the vulnerability to supply disruptions during times of conflict. India’s historical struggles to obtain basic necessities during wartime underscore this point.
Additionally, nations reliant on exporting raw materials while importing manufactured goods often find themselves at a disadvantage, perpetuating low living standards. Furthermore, unchecked trade can deplete a country’s finite natural resources, leading to long-term consequences. The influx of harmful substances and luxury goods can harm public health, as evidenced by the opium trade in China.
Moreover, trade rivalries have historically escalated into conflicts, such as the role of German economic ambitions in sparking past world wars. Closer to home, tensions between neighboring countries like India and Pakistan can be exacerbated by conflicting trade interests. These examples highlight the intricate balance between the benefits and risks of international trade, urging for careful consideration and strategic policymaking.
