Trade and Globalization

Trade and Globalization

Countries engage in international trade to focus on producing goods most efficiently and to achieve economies of scale in production.

Countries engage in international trade for two basic reasons, each of which contributes to the country’s gain from trade. First, countries trade because they are different from one another. Nations can benefit from their differences by reaching agreements in which each party contributes its strengths and focuses on producing goods efficiently. Second, countries trade to achieve economies of scale in production. If each country produces only a limited range of goods, it can produce each of these goods at a larger scale and hence more efficiently than if it tried to produce everything.

International Trade

While international trade has been present throughout much of history, its economic, social, and political importance have increased in recent centuries, mainly because of industrialization, advanced transportation, globalization, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term “globalization. ” Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialization, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions.

The World Trade Organization (WTO) was formed to supervise and liberalize international trade on January 1, 1995 under the Marrakech Agreement. The organization deals with regulation of trade between participating countries. It provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements.

Trade Sanctions

Trade sanctions against a specific country are sometimes imposed in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years.

Trade Barriers

Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies. All of these are called trade barriers, which are established by a government who implements a protectionist policy.. If a government removes all trade barriers, a condition of free trade exists.

Fair Trade

The fair trade movement promotes the use of labor, environmental, and social standards for the production of commodities, particularly those exported from the Third and Second Worlds to the First World. Importing firms voluntarily adhere to fair trade standards or governments may enforce them through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the common prohibition of goods made using slave labor, to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations (NGOs) also play a role in promoting fair trade standards by serving as independent monitors of compliance with fair trade labeling requirements.

Current Trends

The WTO is attempting to complete negotiations on the Doha Development Round, which was launched in 2001 with an explicit focus on addressing the needs of developing countries. As of June 2012, the future of the Doha Round remains uncertain: The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to the domestic agricultural sector (requested by developed countries) and the substantiation of the international liberalization of fair trade on agricultural products (requested by developing countries) remain the major obstacles. These points of contention have hindered any progress toward launching new WTO negotiations beyond the Doha Development Round.

China

Beginning around 1978, the People’s Republic of China (PRC) began an experiment in economic reform. In contrast to the previous Soviet-style, centrally planned economy, the new measures progressively relaxed restrictions on farming, agricultural distribution and, several years later, urban enterprises and labor.

The more market-oriented approach reduced inefficiencies and stimulated private investment, particularly by farmers, that led to increased productivity and output. The reforms proved successful in terms of increased output, variety, quality, price, and demand. In real terms, the economy doubled in size between 1978 and 1986. By 2008, the economy was 16.7 times the size it was in 1978, and 12.1 times its previous per capita levels.

International trade progressed even more rapidly, doubling on average every 4.5 years. Total two-way trade in January 1998 exceeded that for all of 1978. In the first quarter of 2009, trade exceeded the full-year 1998 level. In 2008, China’s two-way trade totaled US $2.56 trillion. In 1991, the PRC joined the Asia-Pacific Economic Cooperation group, a trade-promotion forum. In 2001, it also joined the World Trade Organization.