Favorable and Contentious Factors in International Trade

Favorable and Contentious Factors in International Trade

There are four main themes that are subject to contention in international trade:

  • Factor substitution. Trade theory underlines that specialization is the outcome of substituting the factors of production brought by comparative advantages. This specialization promotes national productivity in selected economic sectors. However, when an economic system is relatively simple, labor and capital can be effectively reconverted to other uses since labor tends to be used in its most simplistic form. When an economic system is complex (knowledge-intensive), labor no longer needed in production activities that have lost their competitiveness cannot be easily reallocated to other forms of work since the required skill base can be extensive. The same applies to various infrastructures that cannot be reconverted to new uses. Therefore, trade can concomitantly be associated with increased productivity and enduring unemployment.
  • Comparative advantages. While specialization brought by trade leads to an increase in the quantity of goods and lower prices for end-users, some nations do not have notable comparative advantages. Irrespective of their economic characteristics, they may not find a niche to participate and compete in global trade. The opportunities brought by comparative advantages could be captured by a few large leading producers, limiting the participation of smaller countries. With scale economies, a few producers can provide enough goods to satisfy the demand of the global market, leaving limited opportunities for new entrants.
  • Openness. An open economy is characterized by less tariff and non-tariff barriers and the associated lower prices for consumer goods and inputs (parts and raw materials). However, national industries are subject to higher competition levels, which may have an impact on the existing employment structure. Opening an economy that was previously closed can lead to substantial disruption in its manufacturing structure and unemployment. Targeted protectionist measures could be implemented, which may lead to disruptions in the variety and availability of goods.
  • Interdependency. With trade, economies develop interdependencies where collaboration, common standards, and technology exchanges are promoted. However, highly interdependent economies may develop a dependency on a specific array of goods and resources, leading to vulnerability if there are trade disruptions. The most contentious sector is usually agriculture, as few countries are willing to commit the risk of seeing disruptions in the food supply through an over-reliance on foreign suppliers.