Trade

What is Traded?

The spatial pattern of trade is of primary interest to geographers, but flows among countries are often viewed as the result of their relative efficiencies in production. In the 1770s, Adam Smith argued for the economic benefits of trade based on specialization of production between countries. That specialization argument was advanced further by a contemporary of Smith's, David Ricardo, in what is called the law of comparative advantage. That law is derived from an analysis of two countries in which each is able to produce the same two commodities. Even a slight difference in the relative costs of production between the two countries can be shown to be the foundation for trade between them that will result in an overall increase in production and, by implication, lower costs for producers. The law of comparative advantage is a common foundation for many arguments in favor of free (or liberal) trade and of neoliberalism in general. Working in the early to mid 20th century, economists described the sources of comparative advantage in terms of the factor endowments of places and the factor intensities of industries. According to their requirement, factors of production such as labor or capital are unevenly distributed from place to place; some industries are labor intensive, and some are capital intensive in production. When factor intensities of production and factor endowments of places are matched, then comparative advantage arises, and trade can produce benefits. For example, one country well endowed with labor would produce labor-intensive goods to trade for capital-intensive goods produced in a country well endowed with that factor.

Comparative advantage/factor endowment theory is focused on differences in supply conditions between countries as the basis for trade, but more recently, market similarities between countries have been theorized as trade inducing as well. If consumers in different countries have similar incomes and tastes, according to this approach, then producers in those countries will find ready markets for their goods in trade because they produce goods that are attractive in each other's market in terms of their basic characteristics and also because consumers will enjoy the variety that such trade affords. Even if goods are produced for other industries, and not for consumers, the argument holds. Different countries will have producers of specialized goods that can be sold in other countries with similar industrial composition. Similarities in consumption preferences seem easily applicable to trade in services, such as those provided in professional and financial markets and in transportation. Another major component of service trade, however, is tourism, which may conform to differences in “factor” endowments such as good weather, beaches, and cultural attractions.

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