The concept of international trade has been debated among kings, queens, presidents, philosophers, economists and government officials for centuries. In fact, international trade finance companies were birthed from this age-old economic thought.
When you look at trade today in 2019, the argument is the exact same as it was in the beginning of modern time: Does trade between countries bring more benefits, or more harm to a nation? There really isn’t a definitive answer for this question; however, it seems a happy medium like mercantilism is the best that an economy can hope for.
Mercantilism
Between the 1600s and the 1800s in Europe, the first body of thought was created to help explain international trade and it was called mercantilism. Back then, there was physical literature being passed around town. Also, there were mercantalist writers. Most of these writers had opinions on international trade, but their viewpoints were very different. However, some of the core thoughts that were the same amongst all the writers were that trade needs to have a favorable balance. What they meant by this was the value of domestic exports should always exceed the value of foreign imports.
Adam Smith’s Wealth of Nations
As mentioned, there were mercantilist writers. In addition, there were anti-mercantilist writers. Not all of these writers believed that free trade was the way to go, nor did they all believe in creating a system in favor of free trade. The economic thought of international trade was turned upside down with the 1776 publishing of a book called Wealth of Nations by Adam Smith.
In this literature, Smith was able to sway many of his contemporaries on the way international trade was thought about. Smith wrote that economic growth was connected to specialization and labor. He said that specialization helped boost productivity by creating more exports from the same resources. This is the bedrock of achieving higher qualities of living.
As for labor, it was limited, depending on how big the market was. This meant countries who were in smaller markets couldn’t support large-scale specialization like a large city could do. Thus, if done right, international trade would have the ability to increase the size of a market for any country, despite their size or how developed they were.
Comparative Advantage
During the 19th century, another free trade advocate came along named David Ricardo. He helped reinforce the same sentiment as classical economists such as Smith, and what he was saying all along about the benefits of free trade. There were two other very important people named James Mill and Robert Torrens alive at the same time as Ricardo, and had similar ideas during that time period.
The idea of comparative advantage is a country importing goods into their country where the relative cost advantage (not absolute cost advantage) is higher in their country, then in comparison to other parts of the world. For example, let’s say the United States exports oranges, but imports avocados from Mexico. Let’s say, the United States has an absolute cost advantage in both oranges and avocados, because they can produce them both three times as much as Mexico can. However, Mexico can produce an avocado for far less money than the US can, thus, the United States can buy avocados at a cheaper rate than it is for them to grow them. But it costs Mexico more money to produce an orange than it cost the United States to produce an orange.
If the United States can produce oranges and avocados at a higher rate than Mexico, then why trade with them? The reason the United States would still trade with Mexico in this example is, Mexico would have a relative cost advantage. Meaning, it cost them far less to grow an avocado than it cost the United States to grow an avocado. And, vice versa on oranges for both. This would be a great trading situation for both Mexico and the United States.
Final Thoughts
Trade goes all the way back to ancient Greece and beyond. It is the backbone of the world. Without trade, small countries would have trouble developing, and larger countries would have trouble with product variety and competitive pricing.
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