International Trade

INTERNATIONAL TRADE

BY

JOSEPH KEELER

International Trade

Economists have always viewed free international trade as a source of wealth and welfare gains. The voluntary exchange of commodities induces favorable patterns of specialization and, therefore, leads to an improvement in the international division of labor. Since each country is driven to utilize its comparative advantage and to produce what it can produce most efficiently, the global output is increased and gains from international trade accrue to all countries. This optimistic view of free international trade has been challenged both from inside the body of mainstream economic theory (e.g. the optimal-tariff and infant-industry arguments) and by outsiders like dependency theorists. It has survived these critiques, albeit with some qualifications. Knowing that there are some exceptions to the rule, most economists now accept the general validity of the free-international trade principle, at least as a good rule of thumb.

Consequences of international trade have incited a heated controversy among researchers. Some researchers debate the capacity of governments to govern in the globalized world. Others argue over the relationship between international trade and economic development. In this article, we attempt to examine changes in the structure of the international trade network. As discussed below, we believe that changes in network structure at least in part reflect the relationship between international trade and development. In the following section, we present some arguments as to how international trade is related to economic development. As Bruce E. Moon (2000) observed, the same reality -- resource flows between countries -- has been perceived in radically different ways and, as a result, completely different predictions have been made about the consequences of such relations. (Bruce E. Moon; 2000)

The international trade thesis is often associated with neoclassical economics, which supports both free market and international trade liberalization policies. Becoming more persuasive after the collapse of the USSR and Eastern European Communism, neoclassical economic theory claims that international trade enables countries to specialize in the types of production at which they are most efficient. Therefore, international trade liberalization is the best way for an economy to realize its comparative advantages and to increase economic efficiency. Frank J. Macchiarola (2003) asserts that for 170 years the appreciation that international trade benefits a country has been one of the touchstones of professionalism in economics. International trade provides imports of commodities at lower cost, as well as imports of capital, know-how, and entrepreneurship. Insofar as international trade can be relied upon for growth, opening up to international trade and exporting should accelerate development. (Frank J. Macchiarola; 2003)

According to neoclassical economic theory, international trade would largely eliminate the handicaps of countries with limited natural resources or those in lower developmental stages. It is through international trade that developmental opportunities would be more widely distributed across the world. Although the causal direction between open international trade and growth is not clear, many empirical studies support the idea that free and open international trade promotes economic growth. Garrett (2000) finds that there is a catch-up effect, in the sense that countries with a lower initial level of income per capita will tend to grow faster than other countries. Countries with more open international trade policies have a greater ability to capture new technologies being developed in the rest of the world. In other words, international trade liberalization makes the cost of imitating technological innovation lower than the cost of actual innovation by that country. (Garrett, Geoffrey. 2000)

More than a century ago, Karl Marx foresaw the internationalization of capitalism. The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, and establish connections everywhere. The bourgeoisie has through its exploitation of the world-market given a cosmopolitan character to production and consumption in every country.

Garrett (2000) argues that, notwithstanding important similarities with the last great era of internationalization 100 years ago, core features of the contemporary world economy are without historical precedent. These features include two-way manufacturing trade between the north and south and complex multinational production regimes. Garrett asserts that global market integration today is qualitatively different and deeper. Harris (1993) goes further and claims, "These trends are probably producing a paradigm shift of the Kuhn sort". Despite the increasing concern and widespread metaphorical usage, empirical research examining international trade and attempts to articulate it into a formal theory have been lacking. As Bruce E. Moon (2000) correctly observes, "Detailed empirical documentation of international trade trends is severely lacking in comparison with burgeoning literature whose use of the term evokes a range of meanings". Consequently, international trade has been a topic of controversy, especially with regard to its consequences, among both intellectuals and laymen. (Bruce E. Moon; 2000)

The basic concept underlying all international transactions