Persian
Kurdish

Articles

The role of international trade in Wealth of nations

By : Soran Hussein
2016-12-14 14:18:58

 International trade can create competition and large scale of exchange of good and services that can help countries to reach economics of scale. In other words international trade can help countries to realize what they are good at, and what they should import from other countries. Going back through the history, the role of international trade in the wealth of nations in the perspective of three different classes had a different explanation and roles. To begin with, mercantilism viewed trade as win/lose situation, so they encourage trade in order to export more and import less. Since, mercantilist believed that gold is the only form of wealth, so positive term of trade can bring more gold to the country. However, capitalists believes that trade in international scale has benefit for both countries. Both Adam smith and David Ricardo advocated for limited type of government to secure private property and the rule of law in order to facilitate the exchange of goods and services. Adam smith argued in his theory of absolute advantage that if there are two countries with two products, it is efficient for each of them to specialize in producing one of the product. In the other hand, David Ricardo developed his theory and says if there are two countries and one of them has no absolute advantage in the production of any good compare to another country, they still should trade by looking at the ratio. Finally, Karl Marx criticized capitalism because he believed the capitalist class exploits the surplus value produced by workers. In this paper, the rule of international trade in the wealth of nations will be explained by the three schools of economics including mercantilism, capitalism and Marxism.

 

Mercantilism by definition is an economic system that controlled Europe around the 16th, 17th and 18th centuries. Basically, mercantilism had three major propositions about international trade. Firstly, wealth and international power are related to each other, which mean having more wealth gives more power to the state to compare with other nations. Secondly, only through trade wealth can be gained and trade is win/lose condition, and a country will be successful if the amount of export is higher than import. Mercantilism believed that gold and silver are the only form of wealth, so they tried to apply some trade policies to bring more gold to their countries and give less to the other countries. In other words, a government, believing in mercantilism, should encourage export and discourage imports. For example, some countries increased the purchasing power of foreign currencies by law in order to make their own term of trade positive. When the foreign currency of Country A has lots of purchasing power in term of the currency of Country B, Country A is able to buy more products from Country B. Finally, economic activity should be promoted based on its value, which means increasing on manufacturing industries that brings more wealth to the nation, and decreasing agricultural sector. For instance, Alexander Hamilton, in 1791 as U.S minister of finance, argued that the U.S government has to establish trade policies in order to protect infant industries. Hamilton believed that that a new established industry or an infant industry cannot reach economics of scale in a free economic compaction so the rule of the U.S government is to put tariffs on foreign manufacturing industries to protect national infant industries (Hamilton P_94) to illustrate this, according to Dr. Bilal Wahab- An AUIS professor, if a barrel of oil in Kurdistan for example is $4 , but a barrel of oil in Iran is $3, so to protect our product, the KRG should put $2 tax on Iranian oil. As a result demand on our oil will not decrease.

 

KRG’s Oil

Iranian Oil

Pre tax

$ 4

$ 3

post  tax

$ 4

$ 5



                      A new group of economists advocated for free trade, during the 18th century in Britain emerged called capitalist. Their idea about free trade between countries is win-win station, which means that if there are two countries in trade, both of them will benefit. Adam smith and David Ricardo are an example of economists who challenged the concept of mercantilism and its policy. They respectively through absolute advantage and comparative advantage in trade provided a strong logic for abolishing protectionist trade policies. Adam Smith in the theory of absolute advantage gives an example of two countries and two goods, and suggests that if one country is efficient in making a specific product, and the other country is good in making something else, they should have trade. However, this efficiency is described by how much labor used to produce this goods and services. To give an example, Adam Smith said,
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage” (Reinhard). Moreover, David Ricardo, who is the student of Adam smith, corrected and developed the theory of Adam Smith and called it comparative advantage.  He explains if a country has absolute advantage in two products, it should still have trade based on the opportunity cost. Ricardo says, “A country has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that country than for other countries” (Topic)

Karl Marx, who is another scholar, criticized capitalism and developed his own theory called Marxism. Marx talks about trade in society in national scale and then extended to international scale. Marx believed that in any society there are people who work and people who do not work, and the main concern is how to distribute surplus value produced by workers to non-workers. According to Marx in a capitalist society, capitalist class uses workers to make a product and sell it for a higher price while giving minimum salary to workers which in this case exploitation happen, and he believed that government should not have influence on the market because in his opinion the role of government is not protecting private property. This problem existed and had led to a social movement after industrial revolution in which labors have claimed that they do not see the result of their product and asked for a reward. Moreover, Marx believed that this exploitation in terms of international scale reaches to countries as well, and rich countries exploit poor countries by using their labors. To give an example, Apple Company in U.S.A, designs its product in China because of the low labor tuition in this country. According to the United States Department of Labor, “Federal minimum wage in the United States currently stands at $7.25 per an hour, or $1,200-1,300 per a month (United States Department of Labor)”, but in the other hand, “minimum wage in China is only $264 per a month” (Barria). Probably, it is a bigger image of exploitation, and Marx pointed on in his theory.

In conclusion, trade is the main source of exchanging goods and services in order to get economic scale in terms of international level. Basically, trade provides the necessity of nations and completes their needs that cannot be provided by themselves easily. The three classes that mentioned before had their own explanation and policy for trade. Mercantilists viewed trade differently and believed that your win is equal to your opponent’s lose, but capitalists were more optimist and defined trade as win/win situation. Finally, Marxists refused the idea of capitalists and criticized government for protecting private property.


Sources

Barria, Carlos. reuters. n.d. 3 December 2016 <http://www.reuters.com/subjects/global-minimum-wage>.

Hamilton, Alexander. International Political Economy. Thomas Oatley, 1791.

Reinhard, Schumacher. "Domestic growth and the patterns of international trade." Adam Smith’s theory of absolute advantage (n.d.): 62.

Topic. Library Economics Librety. n.d. 3 December 2016 <http://www.econlib.org/library/Topics/Details/comparativeadvantage.html>.

United States Department of Labor. n.d. 3 December 2016 <https://www.dol.gov/general/topic/wages/minimumwage>.