Why is international trade important

Rule beyond the nation state

Michal Parizek

Michal Parizek is a lecturer in international relations at the Faculty of Social Sciences at Charles University, Prague. His main research interests are the structure and functioning of global institutions, especially the WTO, as well as the politics of the EU.
Contact: [email protected]

The global exchange of goods and services has been growing for decades. However, the liberalization of trade also harbors risks, which states counter with protective mechanisms. Within the framework of the WTO and by means of an increasing number of bilateral or regional agreements, trade barriers are to be dismantled and legal certainty in cross-border trade relationships established.

Translation: Britt Maass

Standardized container shipping lowers transport costs and increases freight traffic. The container port of Antwerp 2014 (& copy imago / Belga)

World Trade Challenges

Much of what we buy and consume is imported from abroad. From cell phones to fruit, from cars to jeans, consumer goods reach our markets directly from other countries. Others are made from imported intermediates or raw materials. In 2012, the total value of all goods traded worldwide was around 14 trillion euros. This corresponds to 40 times the German federal budget and a quarter of total economic production worldwide. The gigantic flows of goods represent one of the essential elements of the current globalized economy. They have been growing for decades, and so far there are no signs of an end or a decrease in this growth in the coming years and decades.

The main reason why cross-border flows of goods and services are emerging and increasing is consumer demand - either because goods and services from abroad are cheaper or because they differ from those produced domestically. At the same time, the growth in trade flows was made possible by the dramatic decrease in transport costs, in particular by the introduction of standardized container shipping. A pair of jeans that was produced in Dhaka, Bangladesh, for example, now reaches a warehouse or retail store in a European city without ever leaving the container, which reduces transport costs to a few cents. The costs of global information transmission have also fallen massively in recent years, and this has spurred the growing trade in commercial services. Today it is not uncommon for a European or US hospital to send its patient data, such as X-rays, to Indian hospitals for analysis. Labor costs in India are low, and thanks to the time difference, all analyzes can be done overnight. The cost of transporting the images over the Internet has dropped to practically zero.

There is ample evidence that free trade - trade without artificial barriers such as tariffs or quotas - can offer real benefits. It enables production to take place where it is cheapest and consumption where demand is greatest.

Freight over the sea (& copy Bergmoser + Höller Verlag AG, figure 682 140; source: UNCTAD, estimated 2011)
At the same time, many people are against trade liberalization and point to the negative effects this has on production and employment in their home country. They argue that if goods were allowed to import freely from other countries, domestic manufacturers would lose their customers and go bankrupt. For example, if Peru produces wool jackets at a fraction of the costs that an Italian producer has, then the latter can lose customers if the Peruvian production reaches the European markets unhindered. This creates a dilemma for policy makers that can be called the trade dilemma. They all know that free trade is beneficial for their countries, but at the same time they know that domestic manufacturers are suffering from the opening of markets to imports and that some people are losing their jobs as a result. Economic theory holds that all economies benefit from free trade - more in the long run and with gradual liberalization than with abrupt change. But ultimately all sides would benefit. But individual producers who lose their jobs will feel differently.

To solve this dilemma, most states promote trade liberalization in sectors in which their manufacturers are very competitive, but at the same time try to maintain safeguards and trade restrictions on foreign goods for sectors in which national production is less competitive. For example, many developing countries are in favor of the liberalization of trade in agricultural products because, thanks to the low labor costs, they can produce them at very competitive prices. At the same time, however, they prefer to maintain higher protective tariffs in high-tech industries, since their own industry would not be able to keep up with that in the EU countries, Japan or North America. Conversely, the richer countries are working hard to maintain protection for their highly subsidized agricultural sectors, but are striving to liberalize trade in industrial products such as luxury cars, where they are strong and competitive.

So states know that free trade is inherently beneficial, but their policies often do not reflect this. Therefore, there are still many trade barriers in the world economy. With the protectionist measures, the states not only harm their own consumers (who cannot buy the cheaper imported products), but also the economies of their trading partners. This behavior is particularly pronounced in economic crises, when there is growing domestic political pressure to take protective measures. Indeed, it is widely believed that protectionist measures significantly prolonged and exacerbated the Great Depression of the 1930s. During this period, many states adopted a so-called beggar-thy-neighbor policy, increased their protective tariffs and thus prevented imports from other countries. With many countries adopting such measures, all exporters suffered severe disadvantages, and the freeze in international trade exacerbated the crisis.