12.3: How Does a Country Improve Its Wealth and Well-Being?

How Does a Country Improve Its Wealth and Well-Being?

The International Trade Model

The characteristics of this model are quite simple on the surface. In this strategy, a country embraces free trade (removing barriers to all imports and exports in a country) and willingly participates in all facets of the global economy. The basic benefits of the strategy are as follows:

1. Potential High ROI (Return on Investment)
2. Increased specialization leading to technological advantages
3. Simplified development strategy
4. Less government involvement

Libraries of books have been written about the transformative power of capitalism and other libraries of books have criticized the system. The international trade model asserts that trade between nations is the best way to bring about mutual prosperity for all. As a country removes barriers to trade, there will invariably be winners and losers, but classical macroeconomics (the branch of economics that focuses on entire systems rather than individuals or firms) theory posits that the overall benefit will be greater than the losses. The U.S. has championed the strategy since the end of WWII (1945) as it encouraged allies, neighbors, and adversaries to open borders, allow imports, and reduce controls on the free exchange of goods and services between countries. The European Union has done the same as it moved towards a common currency and a free flow of goods and services throughout Europe. The Asian Tigers and BRICS also embrace the global trade system to various degrees, having gained enormous growth in wealth following a recipe that calls for an intensive export oriented economy.

Countries following the strategy remove domestic producer subsidies and allow global competition to decide the ‘winners’ and ‘losers’. As such, countries must find specific services and industries in which to gain specialization. South Korea, for example, elected to focus on low-end electronics initially before moving into other sectors such as ship-building and automobiles. Initially, the products were inferior to those produced elsewhere, but with each generation it improved its workforce, technical knowledge, and facilities until it gained a comparative advantage (ability to produce particular items/services more efficiently than competitors given all the alternatives) in those industries. Specialization requires a lot of practice with an intensity of focus, investment, and time to gain price and quality competitiveness on the global market, but if done correctly the rate of return on investment can be very high. For example, in the post-Korean War era (circa 1953), South Korea transitioned away from an economy based mostly on farming to become the 7th leading exporter in the world, specializing in cars, auto parts, ships, and integrated circuits. Moreover, the technological knowledge can then be used to foster other industries. Under this strategy, governments don’t try to protect certain companies over others, and since tariffs are removed, it simplifies the development strategy.

As countries gain comparative advantages in certain areas, they also tend to relinquish efforts in other areas. For example, as Japan focused on developing its industrial sector after WWII, it focused less on agriculture, depending increasingly upon imports from other countries. Such a trade-off is termed opportunity cost in that choosing to do one thing prohibits you from doing something else. During the 1980’s era, the United States aggressively pursued an international trade model that allowed for more manufactured goods to be imported into the country. People working in areas like steel production, and coal mining began to see their job opportunities diminish as more foreign goods entered the U.S. economy. Proponents of the system argue that such workers need to adapt and become re-trained in other high paying professions in order to escape the pain that comes with economic transformation. Can you think of other industries or jobs that suffer as a result of a country’s choice to follow the international trade model?

A few other negative aspects to the strategy are:

• Susceptibility to unpredictable global markets
• Loss of local control
• Uneven benefits to the population.

Take a look at Figure 9.8. The dramatic price shift (first upward and then downward) represents the dramatic risk associated with global trade. For a farmer that has shifted away from food production and into palm oil (as did millions of farmers in Indonesia and Malaysia in the 2000’s), this price drop is more than just economic theory. It can be the difference between living and dying. Focusing on a few key industries or products within a country comes with serious risks. What if prices drop unexpectedly or global preferences for certain products change without warning? Somebody gets left holding the bag and such shifts are very common in many commodity chains, with those at the bottom suffering the most serious consequences.

Figure | Palm Oil Prices, 2000-2009 Author | Todd Lindley Source | Original Work License | CC BY SA 4.0

The second risk, loss of local control, occurs when countries have entered into free-trade agreements such as the North American Free Trade Agreement (NAFTA) between Mexico, the U.S., and Canada. As U.S. corporations increasingly began to relocate production to Mexico, American workers’ calls for politicians to intervene went unanswered because the agreement prevented state or local governments from taking intentional actions to protect jobs or to keep companies from moving.

Finally, international trade has generated significant growth in production and wealth, but it also brings new competition that disrupts local economies. While customers usually benefit from lower prices of imported products, many local producers lose their livelihoods entirely. As the U.S. lost manufacturing jobs to Mexico, more than 2 million small-scale Mexican farmers also lost their jobs, as Mexican corn could not possibly compete with the low-cost, mass produced crops from the U.S. and Canada. Corn exports to Mexico in 2016 were 5 times higher than in the year before NAFTA. It is not an accident that rates of immigration from Mexico to the U.S. increased dramatically during the same period. As farmers lost their jobs, they moved in search of new ones.