Benefits of International Trade
Idea
Where countries trade along the lines the theory of comparative advantage recommends, international trade yields gains that can be traced to each of the three economic agents. This note catalogues the standard benefits; it reaches no verdict — the offsetting costs of trade are catalogued separately.
Considerations
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Economic growth. Trade raises export revenue and attracts foreign direct investment, lifting aggregate demand; greater export earnings and investment also let firms upgrade technology and the quality of resources and reap internal economies of scale, raising productive capacity and lowering unit costs. The result is both actual and potential growth. Producers gain foreign demand and so higher profits; consumers gain as rising employment and incomes lift purchasing power and the material standard of living.
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Greater quality and quantity of goods and services. Specialisation lets each country export what it is best suited to produce and import a wider variety in return, so consumers enjoy more and better goods than domestic production alone could supply. Producers also gain access to higher-quality imported inputs, raising the quality of their own output and the demand for it.
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Lower prices. Importing cheaper raw materials and inputs lowers domestic producers’ costs of production. Foreign competition forces domestic firms to minimise costs and innovate, pushing them towards productive and dynamic efficiency. Lower import and domestic prices raise consumers’ real purchasing power, and a lower general price level eases cost-push inflationary pressure.
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Technological transfer. Foreign direct investment carries technology across borders, raising the quality and quantity of physical capital, productive capacity and aggregate supply. Producers can develop higher-quality goods, raising demand and profits; consumers enjoy the higher-quality output.
The benefits map onto familiar macroeconomic objectives — growth, low inflation, rising living standards — and supply the “for” side of any free-trade evaluation, to be weighed against the costs.