The exchange of goods and services between one country and another. This exchange takes place because of differences in costs of production between countries, and because it increases the economic welfare of each country by widening the range of goods and services available for consumption. David Ricardo showed by the law of comparative advantage that it was not necessary for one country to have an absolute cost advantage in the production of a commodity for it to find a partner willing to trade. Even if a country produced all commodities more expensively than any other, trade to the benefit of all could take place provided only that the relative costs of production of the different commodities were favourable. Differences in costs of production exist because countries are differently endowed with the resources required. Countries differ as to the type and quantity of raw materials within their borders, their climate, the skill and size of their labour force and their stock of physical capital. Countries will tend to export those commodities whose production requires relatively more than other commodities of those resources of which it has most. By increasing the scope for the specialization of labour and for achieving economies of scale by the enlargement of markets, there is a presumption that international trade should be free from restrictions.
The classical economists condemned mercantilism for its advocacy of government control over trade in order to achieve export surpluses, and the nineteenth and early twentieth century was a period of free trade. This philosophy gave place to the economic protectionism of the inter-war years but was revived again in the Genral Agreement on Tariffs and Trade in 1948. The latter has had some success in reducing tariffs on imports, culminating in the Tokyo Round of trade negotiations in 1974 and the G.A.T.T. ministerial meeting in 1982.
|Reference: The Penguin Dictionary of Economics, 3rd edt.|