- International trade is the exchange of goods and services, has been around for 

thousands of years, but jumped in the past few years 

- Trade agreements and technology reducing time and costs have allowed for more 
efficient trade 
- Half of the world trade happens between developed countries, mostly exporting high 
tech goods like cars. 35 per cent are between developed and developing, the small 
remaining is between the developing countries, who trade primary goods like food 
and textiles 
- Many countries that trade attribute economic growth to this. However, trading 
exposes local businesses to foreign competition  
- Trade attitudes vary. India imposed manufacturing quotas after ww2, called 
import-substituting industrialization, promoting local products 
- Other countries took export-oriented industrialization, like S Korea who engaged 
more in free trade (a larger percentage of GDP in the last few years met w economic 
growth 
 
Why is free trade important? 
 
- Specialization and trade are beneficial due to comparative advantage - this means 
that the country has an economic advantage on a certain resource - in essence, it is 
easier to produce in that country. That country can then export that resource 
efficiently (economically) due to its comparative advantage, and import in products 
that it has a lower comparative advantage for. 
 
- Another advantage is economies of scale, which suggests that more production 
drives costs down. With free trade, every country is producing goods, which leads to 
lower costs for consumers. 
- Inter-industry trade is a beneficial concept that nations use comparative advantage 
to their advantage by exporting goods specialized to them and import goods that are 
more expensive in their region. For example, mangoes are common in Pakistan, not 
Sweden, while Sweden is better at iron production, and iron and mangoes are both in 
demand. Pakistan should import iron from Sweden and Sweden should import 
mangoes, resulting in cheaper iron and mango prices in both countries. 
- To have a comparative advantage, the opportunity cost (what you could have done 
with the cost) should be cheaper in your country. This is important for countries to 
find out which goods to export will provide them with the best comparative 
advantage. 
 
LABOUR PRODUCTIVITY 
 
- According to Hecker-Ohlin trade theory, labour productivity relies on the skills of the 
workers, the technology (machinery, capital) and the organization of the firm.  
- Following this theory, workers in industrialized countries are better at manufacturing 
high-tech goods like cars and phones, as they are endowed with better capital. On the 
other hand, developing countries get a comparative advantage through unskilled 
labour, producing primary goods like textiles and rice. This is the drive for 
 North-South trade, where less developed countries import manufactured goods and 
export primary goods and vice versa. 
 
Comparative advantage works when different countries require different resources that have 
a lower opportunity cost in the other country. What drives trade between developed 
countries producing similar goods? 
 
- Economies of scale. With more producers in the same industry, there is more supply 
to meet the demand, and this also drives the price down for consumers. For 
manufactured goods, capital is very expensive so they produce lots of goods. 
- Product differentiation keeps consumers attracted due to a higher variety of goods. 
- Without intra-industry (between an industry) trade between developed countries, 
domestic customers would be subject to higher prices and less variety. 
 
 
WHY IS FREE TRADE BAD? 
 
- In developed countries, free trade is opposed by unions usually specializing in low 
skilled labour, advocating for trade barriers. Free Trade negatively affects domestic 
trade and forces local businesses to drive prices down due to competition. 
- Free trade is overall beneficial for a country’s welfare, but some groups, such as 
low-skilled workers will be negatively affected. It is up to the government to allocate 
the benefits to ensure everyone receives an advantage, which does not always 
happen. 
- Unions worry that low skilled jobs are occupied by immigrants, leaving members 
unemployed. This has increased the wage gap between the manufacturing and 
service sectors. 
- Due to the comparative advantage theory, prices of primary goods and services 
decrease in businesses from developed countries, as they face competition from 
developing countries which sell these products at a cheaper price. Meanwhile, prices 
of manufactured goods increase due to foreign demand. This means that 
lower-skilled workers in the primary sector receive lower wages and are less-needed 
(unemployment) than higher-skilled workers in manufacturing. It’s important to note 
that this is temporary as lower-skilled workers move on to work in the 
export-competing industry. 
- In more developed countries, governments respond to free trade by subsidizing local 
businesses, such as to agriculture in the primary sector which faces severe 
competition from developing countries’ exports. They have subsidized 350 billion 
dollars in the developed world. 
- However, protectionism mostly happens due to powerful interest groups that 
influence politicians. For example, a politician might vote to subsidize local 
industries, bringing costs up and lowering overall standard of living, even though 
using exports through North-South trade would result in cheaper prices, just to get 
more votes influenced by these interest groups. 
 
How do developing countries overcome competition from developed countries? 
 
- Presently, it is difficult for developing countries to compete with the developed 
countries who already benefit from economies of scale, able to produce more goods 
for a cheaper price. The solution is through initial protection until these businesses 
have expanded enough to benefit from economies of scale, this is called the infant 
industry argument. 
- Another solution is to place trade barriers, substituting exports with domestically 
produced goods, even if this is more expensive. This is called import substitution. 
- Governments could also encourage banks to invest in manufacturing industries, 
leading to comparative advantage. This is compensated with loans. 
- However, the workforce might be missing the necessary skills and the industries 
might be limited to a domestic market in the future, unable to compete in the global 
market. 
- For example, Latin America chose an import-substitution route as they were trapped 
as exporters of primary goods, unable to move on to manufacturing.  
 
Why is exporting primary goods bad for developing countries? 
 
- Exporting primary goods are unsustainable as they are subject to severe competition 
from subsidization in developed countries and from other countries exporting similar 
goods.  
- Manufacturing is more desirable as countries get to benefit from product 
differentiation and intra-industry trade. 
 
International Trade policy