Unit nine. Trade Text 1 The Economic Basis for Trade

Why do nations trade? What is the basis for trade between nations? Stated most generally, international trade is a means by which nations can specialize, increase the productivity of their resources, and thereby realize a larger total output than otherwise. Sovereign nations, like individuals and regions of a nation, can gain by specializing in those products which they can produce with greatest relative efficiency and by trading for those goods they cannot produce efficiently.

A more sophisticated answer to the question “Why do nations trade?” hinges upon two points. First, the distribution of economic resources – natural, human, and capital goods – among the nations of the world is quite uneven; nations are substantially different in their endowments of economic resources. Second, the efficient production of various goods requires different technologies or combinations of resources.

The character and interaction of these two points can be readily illustrated. Japan, for example, has a large and well-educated labor force; skilled labor is abundant and therefore cheap. Hence, Japan can produce efficiently (at low cost) a variety of goods whose production requires much skilled labor; cameras, transistor radios, and video recorders are some examples of such labor-intensive commodities.

In contrast, Australia has vast amounts of land in comparison with its human and capital resources and hence can cheaply produce such land-intensive commodities as wheat, wool, and meat.

Brazil possesses the soil, tropical climate, rainfall, and ample supplies of unskilled labor requisite to the efficient low-cost production of coffee.

Industrially advanced nations are in a strategic position to produce cheaply a variety of capital-intensive goods, for example, automobiles, agricultural equipment, machinery, and chemicals.

Text 2

Increasing International Trade

It might seem that governments only act to restrain international trade. On the contrary, governments and international financial organizations work to increase it.

After World War II, many nations wanted to make international trade easier. In 1947 they adopted the General Agreement on Tariffs and Trade (GATT) to reduce tariffs and other barriers. GATT offered a basic set of rules for trade negotiations. It also created an agency that oversaw and carried out the rules. The ninety-six member countries of GATT met each year to review recommendations, settle disputes, and study new ways to reduce tariffs.

The 1990 GATT rounds were completely unsuccessful. They did not phase out the tight quotas that rich countries use to restrict imports of clothing and fabrics from low-cost producers like Costa Rica. Thus U.S. consumers might have to pay an extra $20 billion a year for clothing made at home. In 1995, GATT became the WTO (World Trade Organization). The idea of the WTO is the same as GATT – to make world trade easier and cheaper – but the WTO has more powers to solve disagreements between countries.

A couple of international financial organizations are having more success. The World Bank, formally the International Bank for Reconstruction and Development, has offered low-interest loans to developing nations. The purpose of the loans was to help build infrastructure of developing countries – roads, power plants, schools, drainage projects, hospitals, and the like. But now the World Bank offers loans to help developing nations relieve their debt burden. To receive these debt-relief loans, the countries must pledge to lower trade barriers and aid private enterprises.

The International Monetary Fund (IMF) is also an international bank. It gives short-term loans to countries with a bad balance of trade. The IMF was founded in 1944 by forty-four countries and later became affiliated with the United Nations. The main goals of the IMF are to help steady exchange rates and oversee money exchanges by countries. Now the IMF is also making long-term loans to very poor nations to help them strengthen their economy.