International Trade: Theory and Practice

Adam Smith's theory of comparative advantage: if a country can obtain a commodity cheaper from another country, it's economically beneficial to import that commodity.

Division of labor and specialization leads to increased productivity.

Comparative advantage depends on a country's inherent endowments and those of its trade partners.

Factors of production: land, labor, and capital.

Trade is mutually beneficial but is often restricted due to various reasons and actors.

Trade restrictions include tariffs, quotas, nontariff barriers, and subsidies.

Protectionism vs. free trade: winners and losers of international trade.

Foreign trade hurts domestic producers, leading to protectionist policies.

Factor-based preferences: the Heckscher-Ohlin theorem states that countries export goods made with their abundant factor, and thus prefer free trade.

Specific factors-based preferences: when factors are tied to industries, trade affects all factors in the same way, and export industries benefit from freer trade.

Winners and losers of free trade/protectionism: protectionism benefits domestic protected industries, while consumers, foreign producers, and domestic exporters lose.

Compensation for the losers of free trade: some gains from trade can be used to compensate the losers, weakening their opposition to free trade.

Export-oriented sectors want freer trade, while import-competing sectors want protectionism.

Patterns of trade restrictions: some actors have political power over trade policy, creating a collective action problem. Policy change can be seen as a public good for a group.

Consumers, who are the largest group, exercise less influence than producers.

Foreign producers have limited political clout.

Adam Smith advocates for comparative advantage, encouraging countries to specialize and trade for mutual benefit.

Comparative advantage depends on a country's endowments and those of its trading partners.

Factors of production include land, labor, and capital.

Trade restrictions, such as tariffs, quotas, and subsidies, exist despite the potential negative effects on welfare and productivity.

Wars can be costly for countries, and trade restrictions can be influenced by various actors.

Protectionist policies can be driven by domestic preferences, particularly for countries with abundant or specific factors.

Winners and losers of free trade include domestic producers, consumers, and foreign producers.

Compensation for the losers of free trade can weaken their opposition and promote support for freer trade.

Patterns of trade restrictions can be influenced by political power and policy change.

Collective action problems and policy change can impact the implementation of trade policies.

Consumers, as the largest group, generally have less influence on trade policies compared to producers.

Foreign producers can have limited political clout.

Export-oriented sectors generally favor freer trade, while import-competing sectors favor protectionism.

The losers of free trade include consumers of imported goods, foreign producers, and domestic exporters.

Politicians promoting protectionist policies can face backlash from citizens opposed to such policies.

Compensation for the losers of free trade can take various forms, such as worker retraining programs and unemployment benefits.

Some countries, particularly those with abundant land for agriculture, can be more open to trade due to their comparative advantage.