I.

Course Overview/ Orientation International Trade Theories

What is Trade? It is the action of buying and selling goods and services

 What is the difference between global and international? "International" refers

to issues and concerns of two or more countries, while "global" refers to issues and
concerns of the entire world .
123

 "International" has a smaller scope encompassing only two or more countries, while
"global" has a much larger scope which includes the whole world .1

 Globalization is the end result while internationalization is one of the

tasks/tools/processes to achieve them .
4

Let’s define:

Iinternational Trade, economic transactions that are made between countries.

Among the items commonly traded are consumer goods, such as television sets and
clothing; capital goods, such as machinery; and raw materials and food. Other
transactions involve services, such as travel services and payments for foreign patents
(see service industry). International trade transactions are facilitated by international
financial payments, in which the private banking system and the central banks of the
trading nations play important roles.

International trade and the accompanying financial transactions are generally conducted
for the purpose of providing a nation with commodities it lacks in exchange for those
that it produces in abundance; such transactions, functioning with other economic
policies, tend to improve a nation’s standard of living. Much of the modern history of
international relations concerns efforts to promote freer trade between nations. This
article provides a historical overview of the structure of international trade and of the
leading institutions that were developed to promote such trade.

Historical overview
The barter of goods or services among different peoples is an age-old practice,
probably as old as human history. International trade, however, refers specifically to an
exchange between members of different nations, and accounts and explanations of
such trade begin (despite fragmentary earlier discussion) only with the rise of the
modern nation-state at the close of the European Middle Ages. As political thinkers and
philosophers began to examine the nature and function of the nation, trade with other
countries became a particular topic of their inquiry. It is, accordingly, no surprise to find
one of the earliest attempts to describe the function of international trade within that
highly nationalistic body of thought now known as mercantilism.

Mercantilism

Mercantilist analysis, which reached the peak of its influence upon European thought in
the 16th and 17th centuries, focused directly upon the welfare of the nation. It insisted
that the acquisition of wealth, particularly wealth in the form of gold, was of paramount
importance for national policy. Mercantilists took the virtues of gold almost as an article
of faith; consequently, they never sought to explain adequately why the pursuit of gold
deserved such a high priority in their economic plans.

Mercantilism was based on the conviction that national interests are inevitably in conflict
—that one nation can increase its trade only at the expense of other nations. Thus,
governments were led to impose price and wage controls, foster national industries,
promote exports of finished goods and imports of raw materials, while at the same time
limiting the exports of raw materials and the imports of finished goods. The state
endeavoured to provide its citizens with a monopoly of the resources and trade outlets
of its colonies.

The trade policy dictated by mercantilist philosophy was accordingly simple: encourage
exports, discourage imports, and take the proceeds of the resulting export surplus in
gold. Mercantilists’ ideas often were intellectually shallow, and indeed their trade policy
may have been little more than a rationalization of the interests of a rising merchant
class that wanted wider markets—hence the emphasis on expanding exports—coupled
with protection against competition in the form of imported goods.

Liberalism Adam Smith-is the father of economics. A strong

reaction against mercantilist attitudes began to take shape toward the middle of the 18th
century. In France, the economists known as Physiocrats demanded liberty of
production and trade. In England, economist Adam Smith demonstrated in his book The
Wealth of Nations (1776) the advantages of removing trade restrictions. Economists
and businessmen voiced their opposition to excessively high and often prohibitive
customs duties and urged the negotiation of trade agreements with foreign powers. This
change in attitudes led to the signing of a number of agreements embodying the new
liberal ideas about trade, among them the Anglo-French Treaty of 1786, which ended
what had been an economic war between the two countries.

After Adam Smith, the basic tenets of mercantilism were no longer considered
defensible. This did not, however, mean that nations abandoned all mercantilist policies.
Restrictive economic policies were now justified by the claim that, up to a certain point,
the government should keep foreign merchandise off the domestic market in order to
shelter national production from outside competition. To this end, customs levies were
introduced in increasing number, replacing outright bans on imports, which became less
and less frequent.

In the middle of the 19th century, a protective customs policy effectively sheltered many
national economies from outside competition. The French tariff of 1860, for example,
charged extremely high rates on British products: 60 percent on pig iron; 40 to 50
percent on machinery; and 600 to 800 percent on woolen blankets. Transport costs
between the two countries provided further protection.

A triumph for liberal ideas was the Anglo-French trade agreement of 1860, which
provided that French protective duties were to be reduced to a maximum of 25 percent
within five years, with free entry of all French products except wines into Britain. This
agreement was followed by other European trade pacts.

3. Resurgence of protectionism - refers to a reaction in favor of protection that

spread throughout the Western world in the latter part of the 19th century 1. Although the
impact of trade-restricting measures enacted so far is small, the risk of a devastating
resurgence of protectionism is real. A trade war today would generate even greater
losses than those associated with protectionism during the Great Depressio

A reaction in favour of protection spread throughout the Western world in the latter part
of the 19th century. Germany adopted a systematically protectionist policy and was
soon followed by most other nations. Shortly after 1860, during the Civil War, the United
States raised its duties sharply; the McKinley Tariff Act of 1890 was ultraprotectionist.
The United Kingdom was the only country to remain faithful to the principles of free
trade.
But the protectionism of the last quarter of the 19th century was mild by comparison
with the mercantilist policies that had been common in the 17th century and were to be
revived between the two world wars. Extensive economic liberty prevailed by 1913.
Quantitative restrictions were unheard of, and customs duties were low and stable.
Currencies were freely convertible into gold, which in effect was a common international
money. Balance-of-payments problems were few. People who wished to settle and work
in a country could go where they wished with few restrictions; they could open
businesses, enter trade, or export capital freely. Equal opportunity to compete was the
general rule, the sole exception being the existence of limited customs preferences
between certain countries, most usually between a home country and its colonies.
Trade was freer throughout the Western world in 1913 than it was in Europe in 1970.

4. The “new” mercantilism refers to a period after World War I when world trade was
disrupted, leading to the imposition of new trade restrictions and protectionist
measures by many countries.

League of Nations conference

World War I wrought havoc on these orderly trading conditions. By the end of the
hostilities, world trade had been disrupted to a degree that made recovery very difficult.
The first five years of the postwar period were marked by the dismantling of wartime
controls. An economic downturn in 1920, followed by the commercial advantages that
accrued to countries whose currencies had depreciated (as had Germany’s), prompted
many countries to impose new trade restrictions. The resulting protectionist tide
engulfed the world economy, not because policy makers consciously adhered to any
specific theory but because of nationalist ideologies and the pressure of economic
conditions. In an attempt to end the continual raising of customs barriers, the League of
Nations organized the first World Economic Conference in May 1927. Twenty-nine
states, including the main industrial countries, subscribed to an international
convention that was the most minutely detailed and balanced multilateral trade
agreement approved to date. It was a precursor of the arrangements made under the
General Agreement on Tariffs and Trade (GATT) of 1947.

However, the 1927 agreement remained practically without effect. During the Great
Depression of the 1930s, unemployment in major countries reached unprecedented
levels and engendered an epidemic of protectionist measures. Countries attempted to
shore up their balance of payments by raising their customs duties and introducing a
range of import quotas or even import prohibitions, accompanied by exchange controls.

From 1933 onward, the recommendations of all the postwar economic conferences
based on the fundamental postulates of economic liberalism were ignored. The planning
of foreign trade came to be considered a normal function of the state. Mercantilist
policies dominated the world scene until after World War II, when trade agreements
and supranational organizations became the chief means of managing and promoting
international trade.

The theory of international trade:

This is a branch of economics that studies the patterns, origins, and effects of trade
across national borders. It provides guidance to companies and policymakers about the
benefits and costs of trade policies. There are different theories of international trade, such as
mercantilism, classical, modern, and new theories, that explain the trade practices based on
different assumptions and perspectives.

The theories of international trade have been proposed from the sixteenth century to
the present while they have been adapting to the realities of each era.

These theories have become increasingly complex over the years, because they seek
to respond to all the scenarios and problems that have arisen in the field of international
trade.

Theories of international trade are born as a consequence of the need to understand

the commercial relations between different countries and to favor the economic growth
of these countries.

Through these theories, human beings have tried to understand the reasons for trade
between nations, their effects and their different implications.

6 main theories of international trade

The following are the most important precepts of each:
1- Theory of mercantilism
It arose in England in the middle of the sixteenth century. One of its main precepts had to do with the
need to generate more exports than imports, and the definition of gold and silver as the most
important elements of a country's economic heritage.

The mercantilist theory indicated that greater exports would generate greater wealth and, therefore,
greater power in a nation.

According to this theory, the generated of the exports would allow to pay for the imports and, in
addition, to generate profits.

According to the mercantilist theory, greater exports should be generated than imports; therefore,
the State played a key role in restricting imports.

This limitation was carried out through economic sanctions, the generation of import monopolies,
among other actions.

2- Theory of absolute advantage

The theory of absolute advantage was proposed by the Scottish philosopher and economist Adam
Smith , who was against the application of high taxes and state restrictions.

In 1776 he published the work" The Wealth of Nations ", By which it stipulated that nations should
identify the productive area in which they had an absolute advantage, and specialize in it.

The concept of absolute advantage applies to that production that can be more efficient and of better
quality.

Smith considered these to be the products to be exported, and imports could include products that
could be obtained in the nation itself, provided that the importation of those products cost less than
the production of those products in the country itself.

3- Theory of comparative advantage

The English economist David Ricardo published in 1817 the book" Principles of Political Economy
and Taxation n", work in which it raises its economic theory.

According to Ricardo, if a country has an advantage over two products, it will have an absolute
advantage over the one produced with better efficiency, and relative advantage over the one
produced with less efficiency. This second product, with relative advantage, can be imported from
other countries.

Comparative theory states that the value of products is linked to how much work it takes to produce
them.

Like the theory of absolute advantage, it favors free trade and reciprocal trade relations between
countries.

4- Theory of the proportion of factors

The main premise of this theory, proposed in the first decades of 1900 by the Swedish economists
Eli Heckscher and Bertil Ohlin, has to do with the notion that each country will be more efficient in
the production of those products whose raw material is abundant in its territory.
The theory of the proportion of factors establishes that a nation must export those products whose
factors of production are abundant, and import those that use scarce productive factors in the
country.

The Heckscher-Ohlin theory implies that trade is defined by the availability of productive factors in
each country.

Some arguments to the contrary indicate that the statement is clearly related to the natural
resources of a country, but when it comes to industrial resources, the application of the theory is less
direct.

5- Theory of the life cycle of the product

This theory was proposed by the American economist Raymond Vernon in 1966. Vernon determines
that the characteristics of export and import of a product can vary during the commercialization
process.

Vernon determines 3 phases in the product cycle: introduction, maturity and standardization.

Introduction
A developed country has the possibility of generating an invention and offers it to its domestic
market. Being a new product, its introduction in the market is gradual.

The production is located near the market to which it is directed, in order to be able to respond
quickly to the demand and to be able to receive direct feedback from the consumers. International
trade does not yet exist at this stage.

Maturity
At this point it is possible to start mass production work, because the characteristics of the product
have already been tested and established according to the response given by consumers.

The production incorporates more sophisticated technical elements, which allows a larger scale
production. The demand for the product can begin to be generated outside the producing country,
and it begins to export to other developed countries.

It is possible that at this stage the developed country that generated the innovative product promotes
the production of such product abroad, whenever it is economically convenient.

Standardization
In this phase the product has been commercialized, so its characteristics and notions of how it is
produced are known by the commercial factors.

According to Vernon, at this time it is possible that the product in question is manufactured in
developing countries.

Since the cost of production is lower in developing countries than in developed countries, developed
countries could import the product concerned from developing countries at this stage.

6- New theory of international trade

Its main promoters were James Brander, Barbara Spencer, Avinash Dixit and Paul Krugman. This
notion arose in the seventies and poses solutions to the flaws found in previous theories.

Among its precepts is the need for state intervention to solve certain problems that are generated in
the commercial dynamics, such as imperfect competition that exists in the market.

They also indicate that the most widespread trade at the global level is the intraindustrial, which
arises as a consequence of an economy of scales (scenario in which it occurs more at a lower cost).

Simplified theory of comparative advantage

For clarity of exposition, the theory of comparative advantage is usually first outlined as
though only two countries and only two commodities were involved, although the
principles are by no means limited to such cases. Again for clarity, the cost of production
is usually measured only in terms of labour time and effort; the cost of a unit of cloth,
for example, might be given as two hours of work. The two countries will be called A and
B; and the two commodities produced, wine and cloth. The labour time required to
produce a unit of either commodity in either country is as follows:

cost of production (labour time)

country A country B

wine (1 unit) 1 hour 2 hours

cloth (1 unit) 2 hours 6 hours

As compared with country A, country B is productively inefficient. Its workers need more
time to turn out a unit of wine or a unit of cloth. This relative inefficiency may result from
differences in climate, in worker training or skill, in the amount of available tools and
equipment, or from numerous other reasons. Ricardo took it for granted that such
differences do exist, and he was not concerned with their origins.

Country A is said to have an absolute advantage in the production of both wine and
cloth because it is more efficient in the production of both goods. Accordingly, A’s
absolute advantage seemingly invites the conclusion that country B could not possibly
compete with country A, and indeed that if trade were to be opened up between them,
country B would be competitively overwhelmed. Ricardo, who focused chiefly on labour
costs, insisted that this conclusion is false. The critical factor is that country B’s
disadvantage is less pronounced in wine production, in which its workers require only
twice as much time for a single unit as do the workers in A, than it is in cloth production,
in which the required time is three times as great. This means, Ricardo pointed out, that
country B will have a comparative advantage in wine production. Both countries will
profit, in terms of the real income they enjoy, if country B specializes in wine production,
exporting part of its output to country A, and if country A specializes in cloth production,
exporting part of its output to country B. Paradoxical though it may seem, it is preferable
for country A to leave wine production to country B, despite the fact that A’s workers can
produce wine of equal quality in half the time that B’s workers can do so.

The incentive to export and to import can be explained in price terms. In country A
(before international trade), the price of cloth ought to be twice that of wine, since a unit
of cloth requires twice as much labour effort. If this price ratio is not satisfied, one of the
two commodities will be overpriced and the other underpriced. Labour will then move
out of the underpriced occupation and into the other, until the resulting shortage of the
underpriced commodity drives up its price. In country B (again, before trade), a cloth
unit should cost three times as much as a wine unit, since a unit of cloth requires three
times as much labour effort. Hence, a typical before-trade price relationship, matching
the underlying real cost ratio in each country, might be as follows:

country A country B

Price of wine per unit $5 £1

Price of cloth per unit $10 £3

The absolute levels of price do not matter. All that is necessary is that in each country
the ratio of the two prices should match the labour–cost ratio.

As soon as the opportunity for exchange between the two countries is opened up, the
difference between the wine–cloth price ratio in country A (namely, 5:10, or 1:2) and
that in country B (which is 1:3) provides the opportunity of a trading profit. Cloth will
begin to move from A to B, and wine from B to A. As an illustration, a trader in A,
starting with an initial investment of $10, would buy a unit of cloth, sell it in B for £3, buy
3 units of B’s wine with the proceeds, and sell this in A for $15. (This example assumes,
for simplicity, that costs of transporting goods are negligible or zero. The introduction of
transport costs complicates the analysis somewhat, but it does not change the
conclusions, unless these costs are so high as to make trade impossible.)

So long as the ratio of prices in country A differs from that in country B, the flow of
goods between the two countries will steadily increase as traders become increasingly
aware of the profit to be obtained by moving goods between the two countries. Prices,
however, will be affected by these changing flows of goods. The wine price in country A,
for example, can be expected to fall as larger and larger supplies of imported wine
become available. Thus A’s wine–cloth price ratio of 1:2 will fall. For comparable
reasons, B’s price ratio of 1:3 will rise. When the two ratios meet, at some intermediate
level (in the example earlier, at 1:21/2), the flow of goods will stabilize.

Amplification of the theory

At a later stage in the history of comparative-advantage theory, English philosopher and
political economist John Stuart Mill showed that the determination of the exact after-
trade price ratio was a supply-and-demand problem. At each possible intermediate ratio
(within the range of 1:2 and 1:3), country A would want to import a particular quantity of
wine and export a particular quantity of cloth. At that same possible ratio, country B
would also wish to import and export particular amounts of cloth and of wine. For any
intermediate ratio taken at random, however, A’s export-import quantities are unlikely to
match those of B. Ordinarily, there will be just one intermediate ratio at which the
quantities correspond; that is the final trading ratio at which quantities exchanged will
stabilize. Indeed, once they have stabilized, there is no further profit in exchanging
goods. Even with such profits eliminated, however, there is no reason why A producers
should want to stop selling part of their cloth in B, since the return there is as good as
that obtained from domestic sales. Furthermore, any falloff in the amounts exported and
imported would reintroduce profit opportunities.

In this simple example, based on labour costs, the result is complete (and unrealistic)
specialization: country A’s entire labour force will move to cloth production and country
B’s to wine production. More elaborate comparative-advantage models recognize
production costs other than labour (that is, the costs of land and of capital). In such
models, part of country A’s wine industry may survive and compete effectively against
imports, as may also part of B’s cloth industry. The models can be expanded in other
ways—for example, by involving more than two countries or products, by adding
transport costs, or by accommodating a number of other variables such as labour
conditions and product quality. The essential conclusions, however, come from the
elementary model used above, so that this model, despite its simplicity, still provides a
workable outline of the theory. (It should be noted that even the most elaborate
comparative-advantage models continue to rely on certain simplifying assumptions
without which the basic conclusions do not necessarily hold. These assumptions are
discussed below.)

As noted earlier, the effect of this analysis is to correct any false first impression that
low-productivity countries are at a hopeless disadvantage in trading with high-
productivity ones. The impression is false, that is, if one assumes, as comparative-
advantage theory does, that international trade is an exchange of goods between
countries. It is pointless for country A to sell goods to country B, whatever its labour-cost
advantages, if there is nothing that it can profitably take back in exchange for its sales.
With one exception, there will always be at least one commodity that a low-productivity
country such as B can successfully export. Country B must of course pay a price for its
low productivity, as compared with A; but that price is a lower per capita domestic
income and not a disadvantage in international trading. For trading purposes, absolute
productivity levels are unimportant; country B will always find one or more commodities
in which it enjoys a comparative advantage (that is, a commodity in the production of
which its absolute disadvantage is least). The one exception is that case in which
productivity ratios, and consequently pretrade price ratios, happen to match one another
in two countries. This would have been the case had country B required four labour
hours (instead of six) to produce a unit of cloth. In such a circumstance, there would be
no incentive for either country to engage in trade, nor would there be any gain from
trading. In a two-commodity example such as that employed, it might not be unusual to
find matching productivity and price ratios. But as soon as one moves on to cases of
three and more commodities, the statistical probability of encountering precisely equal
ratios becomes very small indeed.

The major purpose of the theory of comparative advantage is to illustrate the gains from
international trade. Each country benefits by specializing in those occupations in which
it is relatively efficient; each should export part of that production and take, in exchange,
those goods in whose production it is, for whatever reason, at a comparative
disadvantage. The theory of comparative advantage thus provides a strong argument
for free trade—and indeed for more of a laissez-faire attitude with respect to trade.
Based on this uncomplicated example, the supporting argument is simple: specialization
and free exchange among nations yield higher real income for the participants.

The fact that a country will enjoy higher real income as a consequence of the opening
up of trade does not mean, of course, that every family or individual within the country
will share in that benefit. Producer groups affected by import competition obviously will
suffer, to at least some degree. Individuals are at risk of losing their jobs if the items
they make can be produced more cheaply elsewhere. Comparative-advantage theorists
concede that free trade would affect the relative income position of such groups—and
perhaps even their absolute income level. But they insist that the special interests of
these groups clash with the total national interest, and the most that comparative-
advantage proponents are usually willing to concede is the possible need for temporary
protection against import competition (i.e., to allow those who lose their jobs to
international competition to find new occupations).

Nations do, of course, maintain tariffs and other barriers to imports. For discussion of
the reasons for this seeming clash between actual policies and the lessons of the theory
of comparative advantage, see State interference in international trade.

Sources of comparative advantage

 These are the factors that enable a country to produce a good or service at a
lower opportunity cost than another country. Some sources of comparative advantage
are.

 Natural resources, such as oil, minerals, or fertile land.

 Factor endowments, such as the quantity and quality of labor, capital, and enterprise.
 Economies of large-scale production, such as the ability to exploit increasing returns
to scale and lower average costs.
 Technology, such as the level of innovation and research and development.
 The product cycle, such as the ability to create and market new products before
competitors.

Furher explanations with examples:

1.Natural resources
First, countries can have an advantage because they are richly endowed with a
particular natural resource. For example, countries with plentiful oil resources can
generally produce oil inexpensively. Because Saudi Arabia produces oil very cheaply, it
holds a comparative advantage in oil, and it exports oil in order to finance its purchases
of imports. Similarly, countries with large forests generally are the major exporters of
wood, paper, and paper products. The supply available for export also depends on
domestic demand. Canada has large quantities of lumber available for export to the
United States, not only because of its large areas of forest but also because its small
population consumes little of the supply, leaving much of the lumber available for
export. Climate is another natural resource that provides an export advantage. Thus, for
example, bananas are exported by Central American countries—not Iceland or Finland.

2. Factor endowments: the Heckscher-Ohlin theory

Simply put, countries with plentiful natural resources will generally have a comparative
advantage in products using those resources. A related, but much more subtle,
assertion was put forward by two Swedish economists, Eli Heckscher and Bertil Ohlin.
Ohlin’s work was built upon that of Heckscher. In recognition of his ideas as described
in his path-breaking book, Interregional and International Trade (1933), Ohlin was a
recipient of the Nobel Prize for Economics in 1977.

The Heckscher-Ohlin theory focuses on the two most important factors of production,
labour and capital. Some countries are relatively well-endowed with capital; the typical
worker has plenty of machinery and equipment to assist with the work. In such
countries, wage rates generally are high; as a result, the costs of producing labour-
intensive goods—such as textiles, sporting goods, and simple consumer electronics—
tend to be more expensive than in countries with plentiful labour and low wage rates.
On the other hand, goods requiring much capital and only a little labour (automobiles
and chemicals, for example) tend to be relatively inexpensive in countries with plentiful
and cheap capital. Thus, countries with abundant capital should generally be able to
produce capital-intensive goods relatively inexpensively, exporting them in order to pay
for imports of labour-intensive goods.

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India: Trade

In the Heckscher-Ohlin theory it is not the absolute amount of capital that is important;
rather, it is the amount of capital per worker. A small country like Luxembourg has much
less capital in total than India, but Luxembourg has more capital per worker.
Accordingly, the Heckscher-Ohlin theory predicts that Luxembourg will export capital-
intensive products to India and import labour-intensive products in return.

Despite its plausibility the Heckscher-Ohlin theory is frequently at variance with the
actual patterns of international trade. As an explanation of what countries actually
export and import, it is much less accurate than the more obvious and straightforward
natural resource theory.

One early study of the Heckscher-Ohlin theory was carried out by Wassily Leontief, a
Russian-born U.S. economist. Leontief observed that the United States was relatively
well-endowed with capital. According to the theory, therefore, the United States should
export capital-intensive goods and import labour-intensive ones. He found that the
opposite was in fact the case: U.S. exports are generally more labour intensive than the
type of products that the United States imports. Because his findings were the opposite
of those predicted by the theory, they are known as the Leontief Paradox.

3. Economies of large-scale production

Even if countries have quite similar climates and factor endowments, they may still find
it advantageous to trade. Indeed, economically similar countries often carry on a large
and thriving trade. The prosperous industrialized countries have become one another’s
best customers. A main reason for this situation lies in what is called the economies of
large-scale production (see economy of scale).
For many products, there are advantages in producing on a large scale; costs become
lower as more is produced. Thus, for example, automobiles can be made more cheaply
in a factory producing 100,000 units than in a small factory producing only 1,000 units.
This means that countries have an incentive to specialize in order to reduce costs. To
sell a large volume of output, they may have to look to export markets.

The smaller the country, and the more limited its domestic market, the more incentive it
has to look to international trade as a way of gaining the advantages of large-scale
production. Thus, Luxembourg or Belgium has much more to gain, relatively, than the
United States. Indeed, the advantages of large-scale production were one of the major
sources of gain from the establishment of the European Economic Community (EEC;
ultimately replaced by the European Union), which was formed for the purpose of
providing free trade between most western European countries.

Even a large country such as the United States, however, can gain in some cases by
exporting in order to exploit the economies of production lines. For example, the Boeing
Company has been able to produce airplanes more efficiently and cheaply because it is
able to sell large numbers of aircraft to other countries. The importing countries also
gain because they can buy aircraft abroad at prices far lower than they would pay for
domestically produced equivalents.

4. Technology
Technological development can also provide a distinctive trade advantage. The
relatively advanced countries—particularly the United States, Japan, and those of
western Europe—have been the principal exporters of high-technology products such
as computers and precision machinery.

One important aspect of technology is that it can change rapidly. This is perhaps most
obvious in the computer field, where productivity has increased and costs have fallen
sharply since the early 1960s (see Moore’s law). Such rapid changes present several
challenges. For countries that are not in the front rank, it raises the question of whether
they should import high-technology products or attempt to enter the circle of the most
advanced nations. For the countries that have held the technological lead in the past,
there is always the possibility that they will be overtaken by newcomers. This occurred
in the second half of the 20th century when Japan advanced technologically in its
automobile production to the point where it could challenge the automobile leadership of
North America and Europe. Japan quickly became the world’s foremost producer of
automobiles, and, by the early 21st century, Korean automakers were following the
Japanese example with the aggressive export of automobiles.

Technological advances also strengthen global trade in a general sense: e-commerce

(electronic commerce), for example, reduced the impact of geographic distance by
facilitating fast, efficient, real-time ties between businesses and individuals around the
world. Indeed, at the end of the 20th century, information technology, an industry that
scarcely existed 20 years earlier, exceeded the combined world trade in agriculture,
automobiles, and textiles.

5. The product cycle

The spread of technology across national boundaries means that comparative
advantage can change. The most technologically advanced countries generally have
the advantage in making new products, but as time passes other countries may gain the
advantage. For example, many television sets were produced in the United States
during the 1950s. As time passed, however, and technological change in the television
industry became less rapid, there was less advantage in producing sets in the United
States. Producers of television sets had an incentive to look to other locations, with
lower wage rates. In time, the manufacturers established overseas operations in
Taiwan, Hong Kong, and elsewhere. Concurrently, the United States turned to new
activities, such as the manufacture of supercomputers, the development of computer
software, and new applications of satellite technology.

II. Current Trends And Historical Patterns Of International Trade In Goods And
Services

A publication by UNCTAD that provides key statistics and trends in international trade
for the year 20221. The publication highlights the remarkable trade rebound in 2021 and
2022, following the economic disruptions caused by the COVID-19 pandemic1. The
value of global trade is expected to be about 25% higher in 2022 compared to 20191.
Rising commodity prices and general inflation have contributed to this increase.