Gaining From International Trade

The volume of international trade has grown rapidly in recent decades. In the mid-1980s, approximately 16 percent of the world's output was sold in a different country than that in which it was produced.

The trade sector comprises approximately 8 percent of the U.S. GNP. More than half of all U.S. trade is with Canada, Japan, and the developed nations of Western Europe.

Comparative advantage rather than absolute advantage is the source of gains from trade. As long as the relative production costs of goods differ between nations, the nations will be able to gain from trade.

Mutual gains from trade accrue when each nation specializes in the production of goods for which it is a low opportunity producer and trades for goods for which it is a high opportunity cost producer. This pattern of specialization and trade will allow trading partners to maximize their joint output and expand their consumption possibilities.

Exports and imports are closely linked. The exports of a nation are the primary source of purchasing power used to import goods. When a nation restricts imports, it simultaneously limits the ability of foreigners to acquire the purchasing power necessary to buy the nation's exports.

International competition directs the resources of a nation toward their areas of comparative advantage. In an open economy, when domestic producers have a comparative advantage in the production of a good, they will be able to export their product and compete effectively in the world market. On the other hand, for commodities for which foreign producers have the comparative advantage, a nation could import the goods more economically (at a lower opportunity cost) than they can be produced domestically.

Relative to the no-trade alternative, international exchange and specialization result in lower prices for products that are imported and higher domestic prices for products that are exported. However, the net effect is an expansion in the aggregate output and consumption possibilities available to a nation.

The application of a tariff, quota, or other import restriction to a product reduces the amount of the product that foreigners supply to the domestic market. As a result of diminished supply, consumers face higher prices for the protected product. Essentially, import restrictions are subsidies to producers (and workers) in protected industries at the expense of (a) consumers and (b) producers (and workers) in export industries. Restrictions reduce the ability of domestic producers to specialize in those areas for which their comparative advantage is greatest.

Both high-wage and low-wage countries gain from the opportunity to specialize in the production of goods that they produce at a low opportunity cost. If a low-wage country can supply a good to the United States cheaper than the U.S. can produce it, the U.S. can gain by purchasing the good from the low-wage country and using the scarce resources of the United States to produce other goods for which it has a comparative advantage.

National defense, industrial diversity, and the infant-industry arguments can be used to justify trade restrictions for specific industries under certain conditions. It is clear, though, that the power of special interest groups and voter ignorance about the harmful effects offer the major explanations for real-world protectionist public policy.

In the long-run, trade restrictions do not create jobs. A decline in our imports from other nations leads to a reduction in those nations purchasing power and thus to a reduced demand for our export products. Jobs protected by import restrictions are offset by jobs destroyed in export industries. Since this result of restrictions often goes unnoticed, their political popularity is understandable. Nevertheless, the restrictions are inefficient, since they lead to the loss of potential gains from   specialization and exchange.

Even though trade restrictions promote economic inefficiency, they are often attractive to politicians because they generate visible benefits to special interests- particularly business and labor interests in protected industries-while imposing costs on consumers and taxpayers that are individually small and largely invisible.