DEVELOPMENT ECONOMICS
PRINCIPLES OF INTERNATIONAL TRADE
International trade is an economy’s connection to the global marketplace. A country’s ability to participate actively in trade can help it achieve long-term growth and improve the wellbeing of its citizens.
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Key Concepts
How do trade and economies interact with each other?
We are living in a global economy – driven by the incredible growth of international trade
Value of Global Trade(% of GDP)
How much is your country trading?
Trade has grown significantly over the past decades, and trade has grown more in some places than others.
Data Source
Look up trade data in your country here.
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Trade flows generate important sources of income and allows access to productive inputs
Trading for Future Growth
Why is international borrowing & lending so important?
- Countries normally invest in their economies with national savings
- International trade allows countries to borrow to invest in valuable capital that will drive growth
The free flows of goods and services between countries provide several key benefits to trade participants:
- Liquidity (cash on hand)
- Diversification
- Borrowing & Lending
Our understanding of trade informs how policymakers drive growth
Trade & Growth
- How does trade increase opportunities for growth?
- How does trade decrease the cost of inputs?
Trade Policy
- Why do countries restrict trade?
- How can countries promote trade through policy?
International trade is facilitated through imports and exports of goods and services
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- A product or service that is bought from the global market is an import.
- Imports require payment outflows. They can be inputs to produce goods and services, or products or services that are in direct competition with domestic versions.
- A product or service that is sold into the global market is called an export.
- Exports generate income inflows, offer employment, and can help diversify the economy.
Trade Balance
- The value of exports minus the value of imports = trade balance
- Though imports can lead to some dislocation if their prices are lower and they compete directly with domestic goods, trade is mutually beneficial, not a zero-sum game.
The record of all trade between a country and the world is captured in a country’s Balance of Payments
As firms and individuals buy foreign goods and services, they come in as imports. Any goods or services sold to clients abroad are exports.
National working in foreign countries sometimes send money back home. Likewise, a country may sometime receive grants or aid from foreign nations. These transfers affect the BOP.
As good and services are purchased at home or abroad, money is transferred to the seller for payment.
Balance of Payments consist of three primary components:
Current Account (CA)
The current account includes all exports which are counted as credits (+) and all imports which are counted as debits (-). These include goods and services, as well as monetary gifts (transfers).
Capital Account (KA)
The capital account includes the accumulation (+) or disposal (-) of:
- Assets related to future production (e.g., brand names, trademarks, natural resources, etc.) and,
- Transfers of capital (e.g., debt forgiveness, inheritance transfers, etc.)
Financial Account (FA)
The financial account tracks the sales and purchases of financial assets and liabilities between foreign and domestic entities.
Domestic purchases of foreign financial assets generate payment outflows (-), while foreign purchases of domestic assets generate payment inflows (+).
Trade for Growth
How do countries interact with trade and can trade power growth?
A country’s current account balance indicates whether a country is borrowing or lending
Borrowing – A country is borrowing when it is buying more imports than it is selling in exports. Borrowers must be able to generate enough hard currency reserves to repay their creditors. Crises can occur if foreign investors sell their holdings of domestic assets, which can cause a loss of liquidity in the domestic economy and push the value of the domestic currency down.
Lending – A country is lending when it is selling more exports than it is buying in imports. Lenders might see inflation as reserve inflows increase. They may also lack good domestic investment opportunities, so money flows abroad, seeking better returns.
Trade Deficits: Good or Bad?
Trade deficits are a natural result of the modern global economy, with trade balances fluctuating from year-to-year. However, long-term trade deficits can be unsustainable in some cases.
Video Resources
Watch a short video to learn more here and watch a CFR webinar here.
How much do you owe?
A nation’s balance of payment can vary widely over time due to national, regional, and global economic factors. A nation may have a negative BoP one year and positive the next.
Data Source
Look up BoP data on your country here.
Why would a country engage in borrowing or lending?
- If a country does not have enough savings and is unable to invest adequately from public and private resources, the country’s economy may shrink.
- To avoid a situation in which the economy shrinks, a country needs to borrow from abroad to finance its investment, so it buys more imports than exports and sells assets (bonds) to borrow.
Trade Barriers
Why do countries restrict trade and what tools do they use to restrict trade?
Although trade is mutually beneficial, governments sometimes choose to restrict trade.
Why do governments restrict trade?
Revenue
For some countries, the income and property tax base is relatively small due to underdevelopment and the existence of a large informal economy. A government may rely on domestic sales taxes and trade taxes to generate most of its revenues.
Political Influence
Firms may lobby for protection from competition abroad in exchange for political support. Certain firms may have political influence over policy decisions.
Import Substitution Policy
An industrial policy strategy to boost domestic manufacturing growth by protecting nascent domestic industries with tariffs on import-competing goods.
Countries have two main policy approaches to restricting international trade:
Import Tariffs
Import tariffs are a tax on a specific imported good or service.
Import quantities from the tariff-affected country shrink, domestic sales rise, and consumers pay the full cost of the tariff.
Non-Tariff Barriers
Non-tariff barriers include a variety of tools designed to restrict trade:
- Quantitative restrictions
- Technical barriers to trade
- Export subsidies
- Preferential treatment for domestic firms in government contracts
- Anti-dumping and countervailing duties
How trade accessible is your country?
Each country may use a combination of tariff and non-tariff barriers to restrict international trade.
Data Source
The World Bank and United Nations have created a comprehensive database on global trade. Look up trade accessibility on your country here.
Each type of trade barrier affects different stakeholders differently
Who wins and who loses?
Depending on the design of a trade barrier, different stake holders will benefit from the policy and others will suffer.
- In general, trade barriers will have an overall negative impact on a country’s economy.
- Most types of trade barriers will provide advantages to domestic firms by shielding them from international competition.
- Recent export bans in the wake of COVID-19 have attempted to alleviate domestic shortages for buyers, but have created other distortions.
Learn how better economic governance is key to economic development
Deep Dive: Trade Barriers
Cory Krupp is an economist and a Professor of the Practice of Public Policy in the Sanford School. She has taught courses on International Trade and Policy, Economic Foundations of Development, Microeconomic Policy Tools, European Union Trade and Finance Issues, and Macroeconomic Policy and International Finance. Prof. Krupp also serves as the Associate Dean of Academic Programs at the Sanford School, with responsibility for curriculum development for the school’s main programs.
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