International Trade

Some Characteristics of International Trade

The increasing prominence of international trade is illustrated by the fact that the growth of world merchandise trade has consistently outpaced the growth of world production since the middle of the 20th century. As a result, an increasing percentage of world production over time has been dedicated for sale in foreign countries rather than domestic economies.

Notwithstanding the importance of China as a major trading nation, international trade primarily takes place among developed countries. There are several reasons for this. One is that agriculture accounts for a larger share of production in developing countries than in developed countries, and nontariff barriers to trade are particularly onerous in the case of agricultural products. A second is that international trade reflects, in part, a taste for product variety on the part of consumers. The demand for product variety, in turn, is positively related to a nation's standard of living. A third reason is that the majority of international trade is carried out by multinational companies (MNCs). The location and distribution of MNC production facilities reflects the geographic pattern of foreign direct investment, and developed countries are most often the host and home nations for foreign investors.

Several other characteristics of international trade are worth noting both for purposes of information and for contributing to a better understanding of several major controversies surrounding international trade. One is the prominent role played by MNCs in the international trade process. An MNC is a company with affiliates in foreign countries. The bulk of international trade consists of goods shipped among affiliates of MNCs. Hence, the growth of international trade is mirrored by the growing economic importance of MNCs. Those who are concerned that MNC activities have adverse impacts on both host and home countries are therefore skeptical of the social benefits of international trade.

A second characteristic to note is the predominance of intraregional trade. In the three major economic regions of the world, namely the European Union, North America, and Asia, trade involving countries within each region is greater than trade across those regions. The importance of intraregional trade in part reflects the growth of regional trade agreements such as the North American Free Trade Agreement (NAFTA). [Page 1175]Critics of regional trade agreements argue that the world, especially developing countries in Asia and Africa, would be better served economically by strengthening and extending multilateral trade institutions such as the World Trade Organization (WTO).

Factors Promoting International Trade

Several phenomena have been cited as underlying the dramatic growth of international trade summarized above. One factor is technological change, particularly as it has affected telecommunications and transportation. From the adoption of the telegraph through the spread of the Internet, innovations in telecommunications have reduced the real cost of communicating over long distances and speeded the dissemination of information about economic conditions and developments in distant markets. Consequently, it is less costly and easier for companies to do business at a distance. Moreover, the marriage of computer and telephone technology has spawned the emergence of computer-based management information systems that enable MNCs to better and more cheaply manage far-flung affiliate business activities, including the export and import activities of foreign-based affiliates.

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