(May 12th, 2023)
By (Heloise Quiviger & Alice Estellat, Equity Analysts)
Edited by (Ascanio Cicogna, Head of Research)
Introduction
Nowadays, with the ever-changing geopolitical situation, we should ask ourselves if International trade is still the solution to economic prosperity. International trade refers to the exchange of goods, services, and capital between different countries or regions. It involves the buying and selling of goods and services across borders and is driven by the principles of comparative advantage, where countries specialise in producing goods and services in which they have a lower opportunity cost, and trade with other countries to obtain the goods and services that they cannot produce as efficiently. International trade plays a significant role in the global economy and can have a profound impact on the economic growth and development of countries. For instance, due to the growth in international trade, both beneficial and dangerous dependency has developed between countries.
Advantages and disadvantages of International trade
We first focus on the advantages of such situation. Mainly, international trade promotes a country’s comparative advantage. This refers to the ability of a producer to produce a good or service at a lower opportunity cost than another producer. This means that even if one producer is less efficient than another producer in producing all goods or services, each producer can still benefit from specialising in producing the good or service in which it has a comparative advantage and trading with the other producer. This leads to increased efficiency in production, lower costs, and economic growth. By engaging in international trade, countries have more access to goods and services, more than what they would be able to produce domestically which allows the consumer to access a wider range of goods and services. In addition, with comparative advantage, competition between countries is inevitably increased, which leads to innovation and increased productivity as firms seek to improve their competitiveness.
On the other hand, international trade can have some downfalls; primarily, dependency between countries. This can increase vulnerability, as any disruption in trade with those partners can have a significant impact on the economy. Dependency in international trade can also leave countries vulnerable to external shocks such as changes in global demand, supply disruptions, or changes in exchange rates. For example, if a country heavily relies on a single commodity for export, a drop in demand for that commodity can have a significant impact on its economy. A recent example of this would be the effect of the war in Ukraine. The conflict has disrupted trade routes and caused economic instability, leading to changes in trade patterns and decreased overall trade volumes, Ukraine’s exports in particular. Prior to the conflict, Ukraine was a major exporter of agricultural goods, particularly wheat and corn, as well as iron and steel. However, the conflict has disrupted transportation routes and access to markets, making it more difficult for Ukrainian producers to export their goods. In addition, economic sanctions imposed on Russia by the European Union and the United States have had a negative impact on Ukraine's trade with its largest trading partner.
The conflict has also affected trade between Russia and other countries. Russia has traditionally been a major transit country for goods traveling between Europe and Asia, but the war has led to increased border controls and disruptions to transportation routes. This has led to increased costs and delays for businesses that rely on trade with Russia.
Furthermore, due to the interdependence with respect to some essential goods, countries try to maintain friendly relations with their major trading partners, a political alliance. Since trade helps in increasing foreign exchange reserves, there is no reason as to why two trading partners would want political rivalry, this overtime, may prove problematic for a country. Therefore, dependency on a few key trading partners can also create political tension, as countries may use trade as a tool to exert political pressure on each other. producers. This can lead to social and political tensions within a country. Overall, these issues demonstrate the potential risks associated with dependency in international trade, and highlight the importance of countries diversifying their trade relationships and reducing their reliance on a few key partners.
Finally, international trade can lead to an unequal distribution of gains as the benefits are not always evenly distributed, and some groups, such as workers in declining industries, may suffer job losses or wage stagnation as a result of increased competition from foreign countries.
In conclusion, while international trade can bring significant benefits to countries, it can also create dependency and vulnerability, and the benefits are not always evenly distributed. It is important for countries to manage their trade relationships carefully and to ensure that the gains from trade are shared fairly.
Trends nowadays
Today, international trade is more interconnected than ever before, with goods and services flowing across borders at an unprecedented rate. Technological advancements and the growth of e-commerce have further accelerated the pace of global trade, enabling businesses of all sizes to access new markets and customers around the world. However, this interconnectedness has also brought challenges, such as rising protectionism and geopolitical tensions, which are shaping the current trends in international trade. In this context, it is important to understand the current trends and challenges facing international trade in order to navigate this complex and rapidly changing landscape.
Firstly, there is the issue of increasing protectionism: there has been a trend towards increasing protectionism in some countries, as they seek to protect their domestic industries from foreign competition. This trend has been reflected in policies such as the imposition of tariffs and the renegotiation of trade agreements. There are several factors that have contributed to the increase in protectionism in international trade in recent years. Two of the main drivers of protectionism has been the growing sense of economic nationalism in many countries and the perception of globalisation. As governments seek to protect domestic industries and jobs from foreign competition. This has led to the imposition of tariffs, quotas, and other trade barriers, which can make it more difficult and expensive for businesses to trade internationally. Furthermore, globalisation and free trade have contributed to income inequality and job losses in certain sectors. This has led to a backlash against free trade agreements, particularly in developed countries, where workers are increasingly concerned about the impact of trade on their wages and job security.
Moreover, there has been a significantly increasing emphasis on sustainability, with many countries seeking to promate environmentally friendly practises and reduce their carbon footprint. This has led to the development of green trade agreements and initiatives, such as the Paris Agreement on climate change.This shift towards sustainable trade is being driven by a range of factors, including consumer demand for more ethical and eco-friendly products, growing awareness of the environmental and social impacts of global supply chains, and the adoption of international agreements and frameworks that prioritize sustainability.
One of the key ways that sustainability is being integrated into international trade is through the development of sustainability standards and certifications. These standards help businesses to demonstrate that their products and supply chains meet certain environmental and social criteria, such as reducing greenhouse gas emissions, promoting fair labor practices, or protecting biodiversity. Examples of these certifications include Fairtrade, Forest Stewardship Council (FSC), and Marine Stewardship Council (MSC).
Finally, there have also been shifts in global supply chains. The COVID-19 pandemic has led to disruptions in global supply chains, with many countries seeking to reduce their reliance on a single source of goods and services. This has led to a shift towards regionalisation of supply chains, as well as a growing interest in nearshoring and reshoring. The growing focus on regional trade agreements means that countries are seeking to strengthen their economic ties with neighbouring countries. Examples of such agreements include the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).
Figure 1: Volume of world trade and industrial production.
(2010=100)
Source: OECD calculations based on CPB World Trade Monitor.
Overall, international trade is undergoing a period of significant change, driven by a range of economic, technological, and environmental factors. While globalization and technological advancements have made it easier than ever for businesses to trade internationally, rising protectionism and geopolitical tensions have created new challenges for companies seeking to access global markets. At the same time, the increasing emphasis on sustainability in international trade reflects a growing recognition of the need to address environmental and social concerns related to global commerce. As the world becomes more interconnected, it is likely that international trade will continue to evolve, with businesses and governments working to balance economic growth with sustainability and social responsibility. Understanding the current trends and challenges in international trade will be essential for businesses seeking to navigate this complex and rapidly changing scene.
Today’s trends follow that for a potential return to protectionism (particularly after the major shocks faced by the economy in recent times; the COVID crisis, and the war in Ukraine for instance). However, from the graph shown above, it seems that international trading will eventually find its media via and achieve its steadily increasing stability once again.
Citations:
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Drozdz, J. and Miškinis, A. (no date) Benefits and threats of free trade. Available at: https://www.dbc.wroc.pl/Content/20819/Drozd_Benefits_And_Threats_Of_Free_Trade_2011.pdf (Accessed: 12 May 2023).
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Legal disclosure:
The projections or other information generated by BSTA regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. As such, BSTA does not assume any legal responsibility for actions that may have been taken by readers associated with any investment projections made by the members of BSTA. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
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