SCRIPT: BRIEF HISTORY OF INTERNATIONAL TRADING

International Trade

If you can walk into a supermarket and find Costa Rican bananas, Brazilian coffee, and a bottle of South
African wine, you're experiencing the impacts of international trade.

International trade is the purchase and sale of goods and services by companies in different countries. It
is any legal exchange of goods and services between one country and another i.e. bilateral trade or
between one country and the rest of the world i.e. multilateral trade.

International trade allows countries to expand their markets and access goods and services that
otherwise may not have been available domestically. As a result of international trade, the market is
more competitive. This ultimately results in more competitive pricing and brings a cheaper product
home to the consumer.

Brief History

The beginnings of international trade date back to the ancient world when people first began
traveling long distances to exchange goods.

Silk roads (1st century BC-5th century AD, and 13th-14th centuries AD)

 People have been trading goods for almost as long as they’ve been around. But as of the 1st
century BC, a remarkable phenomenon occurred. For the first time in history, luxury products
from China started to appear on the other edge of the Eurasian continent – in Rome. They got
there after being hauled for thousands of miles along the Silk Road. Trade had stopped being a
local or regional affair and started to become global. That is not to say globalization had started
in earnest. Silk was mostly a luxury good, and so were the spices that were added to the
intercontinental trade between Asia and Europe. As a percentage of the total economy, the
value of these exports was tiny, and many middlemen were involved to get the goods to their
destination. But global trade links were established, and for those involved, it was a goldmine.
From purchase price to final sales price, the multiple went in the dozens.The Silk Road could
prosper in part because two great empires dominated much of the route. If trade was
interrupted, it was most often because of blockades by local enemies of Rome or China. If the
Silk Road eventually closed, as it did after several centuries, the fall of the empires had
everything to do with it. And when it reopened in Marco Polo's late medieval time, it was
because the rise of a new hegemonic empire: the Mongols. It is a pattern we'll see throughout
the history of trade: it thrives when nations protect it, it falls when they don't.

Spice routes (7th-15th centuries)

  The next chapter in trade happened thanks to Islamic merchants. As the new religion spread in
all directions from its Arabian heartland in the 7th century, so did trade. The founder of Islam,
the prophet Mohammed, was famously a merchant, as was his wife Khadija. Trade was thus in
the DNA of the new religion and its followers, and that showed. By the early 9th century,
Muslim traders already dominated Mediterranean and Indian Ocean trade; afterwards, they
could be found as far east as Indonesia, which over time became a Muslim-majority country,
and as far west as Moorish Spain. The main focus of Islamic trade in those Middle Ages were
spices. Unlike silk, spices were traded mainly by sea since ancient times. But by the medieval era
they had become the true focus of international trade. Chief among them were the cloves,
nutmeg and mace from the fabled Spice islands – the Maluku islands in Indonesia. They were
extremely expensive and in high demand, also in Europe. But as with silk, they remained a
luxury product, and trade remained relatively low volume. Globalization still didn’t take off, but
the original Belt (sea route) and Road (Silk Road) of trade between East and West did now exist.

Age of Discovery (15th-18th centuries)

 Truly global trade kicked off in the Age of Discovery. It was in this era, from the end of the 15th
century onwards, that European explorers connected East and West – and accidentally
discovered the Americas. Aided by the discoveries of the so-called “Scientific Revolution” in the
fields of astronomy, mechanics, physics and shipping, the Portuguese, Spanish and later the
Dutch and the English first “discovered”, then subjugated, and finally integrated new lands in
their economies. The Age of Discovery rocked the world. The most (in)famous “discovery” is that
of America by Columbus, which all but ended pre-Colombian civilizations. But the most
consequential exploration was the circumnavigation by Magellan: it opened the door to the
Spice islands, cutting out Arab and Italian middlemen. While trade once again remained small
compared to total GDP, it certainly altered people’s lives. Potatoes, tomatoes, coffee and
chocolate were introduced in Europe, and the price of spices fell steeply.

Aside from these roads, there are also philosophies and theories that supported the rise of
international trade. The evolution of these theories aided economists, government and industries to
comprehend trade internationally in a healthier way.

Mercantilism (16th-18th century; ended permanently in mid-19th century)

 In the mid-sixteenth century a philosophy supporting international trade emerged in England.

Known as mercantilism, the theory asserted that gold and silver (the currency of the time) were
the basis of a nation’s wealth and crucial to healthy and active commercial activity. By exporting
goods a country could earn gold and silver, but when it imported goods, it paid for these with
gold and silver. According to mercantilism, it is in a country's best interest to export more than it
imports, or to maintain what is called a “trade surplus.” Since national wealth and prestige
hinged on accumulations of gold and silver, those countries with the highest value of exports
were the most powerful.
  However, mercantilism brought about many acts against humanity, including slavery and an
imbalanced system of trade. During Great Britain's mercantilist period, colonies faced periods of
inflation and excessive taxation, which caused great distress.

Classical Economics Revolution (18th - 19th century)

 One of the successes of the classical economics revolution was to rebut the mercantilist
tradition that holds the premises that trading can be harmful for the trading countries. The
success was not merely an academic one; as a result of this revolution, Britain, Europe and
eventually the whole world experienced a great economic boom. The revolution was based on
three important realizations.
1. The market does not prefer specialization due to the differences in the inborn merits of
humans. Specialization itself makes the market much more efficient. Even if initially people
have the same general merits, they can still specialize and optimize the market.
2. The market is not a zero sum game. Both sides (countries), in any free transaction, buyers
and sellers, benefit from trading.
3. Similarly, trading improves the condition of (international) producers, regardless of the
efficiency differences between them.
 Despite the fact that these realizations were initial ingredients in the classical revolution, the
classical economists themselves did not integrate them in a single theory. While Adam Smith
talked only on the first and second realizations (Absolute Cost Advantage), David Ricardo
disregards the effect of specialization and focused on the third realization (Comparative Cost
Advantage Theory).

Modern Theory of Trade or General Equilibrium Theory (1919, fully developed in 1935)

 Smith and Ricardo's theories didn't help the countries figure out which products would give
better returns to the country. In 1900s, two economists, Eli Hecksher and Bertil Ohlin, fixated on
how a country could profit by making goods that utilized factors that were in abundance in the
country. They found out that the factors that were in abundance in relation to the demand
would be cheaper and that the factors in great demand comparatively to its supply would be
more expensive.
 The H-0 Theory is also known as the Modern Theory or the General Equilibrium Theory. This
theory focused on factor endowments and factor prices as the most important determinants of
international trade. The H - 0 is divided in two theorems: The H - 0 theorem, and the Factor Price
Equalization Theorem. The H - 0 theorem predicts the pattern of trade while the factor-price
equalization theorem deals with the effect of international trade on factor prices. H - 0 theorem
is further divided in two parts: factor intensity and factor abundance. Factor Abundance can be
explained in terms of physical units and relative factor prices. Physical units include capital and
labor, whereas, relative factor price includes the adjoining expenses like rent, labor cost,
etcetera. On the other hand, factor intensity means capital, labor or technology, etcetera, any
factor that a country has.
New Theories of Trade (1960 - 1990)

 Product Life Cycle Theory was developed by Raymond Vernon in the Mid 1960's after the
failure of Hecksher Ohlin's Theory. The theory, detailed that a product goes through various
stages in the course of its progress. These stages are: (1) new product stage, (2) maturing
product stage, and (3) standardized product stage. This theory assumed that the production of
a new product would take place in the nation where it was innovated. This was a very useful
theory in 1960's. At that time, United States of America was dominating the whole globe in
terms of manufacturing after the World War II.
 New trade theory (NTT) refers to modern economic theory that explains international trade
based on economies of scale, network effects, and first-mover advantage. It helps decipher the
main reason behind globalization and intensive trading between similar economies. In addition,
it paves the way for the government’s role in the industrialization of a country. It opposes the
old theory of trade promoting constant returns of scale, fixed technology, and the presence of
perfect competition. Instead, it says that a first-mover to establish a company in a trade gets the
advantage of being dominant and monopolistic. As a result, a poorer nation may continue
struggling in specific industries due to a lack of economies of scale in their companies.
 In the continuing evolution of international trade theories, Michael Porter of Harvard Business
School developed a new model to explain National Competitive Advantage in 1990. This theory
states that the qualities of the home country are vital for the triumph of a corporation. This
theory was given its name because it is in the shape of a diamond. It describes the factors that
influence the success of an organization. There are Six Model Factors in this theory which are
also known as the determinants. The following are the determinants: Factor Condition; Demand
Conditions; Related and Supporting Industries; Firm Strategy, Structure, and Rivalry; Chance;
and Government.
International Trade Associations

The nations were influenced financially because of World War 1 and World War 2. The reconstruction
couldn’t happen as there was an interruption in the financial system furthermore there was a shortage
of resources. At this crossroads, the prominent economist J. M. Keynes with Bretton Woods establish an
association with 44 countries to meet this and to reestablish commonship on the planet.

This gathering brought forth the International Monetary Fund (IMF), International Bank of
Reconstruction and Development (IBRD) and the International Trade Organization (ITO). These three
associations were considered as three columns for the improvement of the global economy.