• To reap the gains from trade (comparative advantage).• To help the poor countries of the third world.
This is not really an important motive!
The goods that the third world wishes to sell are often kept out of developed countries by high levels of protection in order to assist their own producers. Imports of agricultural produce in particular are often heavilyrestricted for the sake of a relatively small number of farmers.• Pressure from multi-national corporations on the various governments to allowfreer movement of goods and capital (in order to increase their own profits).
This really means why countries trade! If Britain can run an insurance service morecheaply, say, than New Zealand, then it should do so, and sell it to the world (Lloyds of London does this). In this example, we would buy back something, for instance muttonand lamb. It is not necessary or even desirable to try to balance exports and imports witha single country. We wish to balance multi-laterally, on a global basis.
The global trading pattern:
The developed world trades more with itself than with third world countries, which seemssurprising to some.But this is reasonable really! Because:• Income elasticities are high for services and fancy expensive manufactured products, but low for raw materials
revise elasticities and what this means inUnit 1 if you are a bit hazy). The developed world has high incomes, so itimports such things as video cassette recorders and TV sets from Japan.However, few poor developing countries produce such items. Instead they tend to produce raw materials and agricultural products, such as bananas, coconuts, sugar,sisal and hemp all of which have low income elasticities. Where poor countriesdo export hi-tech goods, like TV sets from China, these are inevitably made in joint-ventures, set up with foreign capital and know-how and owned in part byforeign developed countries anyway. Many Japanese products are now made inthird world countries like China, as Japan has exported much of its manufacturingcapacity, a process known there as “hollowing out” the economy.• Comparative advantage and wider consumer choice mean that, if we take motor cars as an example, the Germans make Mercedes and BMW; the French makeCitroens and Peugeots; the Italians make Ferraris and Alfa Romeos …. and theyall sell motorcars to each other.
Chap 6 - 2