Notes on International Trade
Chapter 6 WP
John Maynard Keynes has said that protectionism “rests on the principle of making things relatively scarce….
the community as a whole cannot hope to gain by making artificially scarce what the country wants.”
Robert Skidelsky, John Maynard Keynes, vol. 1, Hopes Betrayed 1883-1920 (New York: Penguin,
Trade barriers have changed dramatically over time: both globally and in individual countries, trade has gone
from generally unhindered to tightly regulated over relatively short periods.
Today, international trade is quite free (unrestricted). Pg. 218
Because trade policy stands at the intersection of international and domestic politics, it involves powerful
interests, important interactions, and influential institutions at both the domestic and international levels.
Domestically, trade interests interact in a battle over national policy, with supporters and opponents of freer
trade squaring off according to their own economic interests.
Interactions are mediated through the national political institutions of trade policy-making: parties,
legislatures, executives, and bureaucracies.
The most prominent trade institutions have been two international organizations that have governed world trade
for sixty years:
1) General Agreement on Trade and Tariffs (GATTS)
2) The World Trade Organization (WTO)
At the regional level, trade-based institutions include the:
1) European Union (EU)—which addresses many other issues as well as those relating to trade.
2) The North American Free Trade Agreement (NAFTA)
3) Southern Common Market (Mercosur)
o The institutions of the international trading system can facilitate cooperation among governments as
they confront the demands of both their own constituents and their foreign counterparts.
o Reducing trade barriers—trade liberalization—is good for a nation’s economy.
Pg. 220—What’s so good about trade?
“Specialization increased productivity, and productivity fuelled economic growth.”
Reference to Adam Smith’s famous example of the individual pin maker: productivity in this context refers to
the amount produced by one unit of labour with the other factors of production—especially land and capital—at
In farming, for example, the same amount of labour is more productive on good soil than on poor, more
productive with machinery and fertilizer and irrigation than without.
He showed that the division & specialization of labour among workers improves productivity. Similarly,
if individual countries specialize in the goods they are best at producing, and trade these goods they gain
Comparative advantage: is the core concept of the economics of trade; it applies the principle of specialization
to countries: like people, they should do what they do best. It implies that a nation gains most by specializing in
producing and exporting what it produces most efficiently. By doing so, it can earn as much as possible in order
to pay for imports of the best products of other countries.
o The principle of comparative advantage has clear implications for free trade. o Trade protection is harmful to the economy as a whole because trade barriers impede a country’s
ability to gain from following its comparative advantage. (MY OWN WORDS)
o Indeed, trade protection raises the price of imports and reduces the efficiency of domestic
Absolute advantage: the ability of a country to or firm to produce more of a particular good or service than
other countries or firms using the same amount of effort and resources.
Policymakers argue that export is good while import is bad for the economy. Importing takes away jobs, while
exporting creates new jobs. Policymakers suggest that governments should encourage a nation’s own economy
with the restriction of imports, and encouragement of exports.
P221 ON THE OTHER HAND, Economic logic opposes this by saying that “imports are the gains from trade,
while exports are its costs.
Explanation: a country imports goods that it cannot make very well itself, which allows the nation to
focus its productive energies on making (and exporting) the goods that it produces best.
Free trade encourages a country to follow its comparative advantage, and economic logic implies that it is the
Pg 221—Why do countries trade what they do?
In the 1920s, Swedish economists Eli Heckscher and Bertil Ohlin addressed this puzzle and extended the
Heckscher-Ohlin trade theory characterizes the basic economic characteristics of a country in terms of its
factor endowments, the material and human resources it possesses.
o These endowments are summarized in terms of basic factors of production, resources essential for
economic activity. Such factors of production include the following:
o Land, an essential input into agricultural production
o Labour, typically understood to refer to undifferentiated and unskilled labour
o Capital for investment, which refers both to the machinery and equipment with which goods are
produced and to the financial assets necessary to employ this machinery and equipment
o Human capital, which refers to skilled labour, so called because the labour has been enhanced by
investment in training and education.
The Heckscher-Ohlin approach tries to explain national comparative advantage, and therefore national trading
patterns. The two economists realized that comparative advantage is not simply a result of effort: for example,
the productivity of farmers depends primarily on characteristics of their land, not on how hard they work. In
countries where land is in short supply and expensive, farming is costly; where it is plentiful and cheap, farming
is low in cost.
o The theory argues that a country will export goods that make intensive use of the resources the country