THEORIES OF INTERNATIONAL TRADE: INTRODUCTION & OBJECTIVES

INTRODUCTION OF TRADE THEORIES

Foreign trade has recently, and particularly after 1991, become an important as well as debatable issue for the Indian economy. The Union budget presented in 1991 introduced a wide range of economic policy reforms related with industry and trade, ushering in an era of economic liberalism in the Indian economy. These reforms were designed to transform a closed and inward-looking economy into an open and outward-looking one by lifting controls on  import  and export of goods and services and by  making rupee convertible. In the years that followed, our trade and industrial production have been growing at fairly high rates.  There is no doubt that the liberal approach to economic policy will continue and the previous bias against international trade and investment will remain subdued in the foreseeable future.  In this new economic environment the, teaching of economics will develop a serious gap if the students are not made aware of the basic principles and concepts of international trade. 

OBJECTIVES OF TRADE THEORIES

The purpose of a trade theory is to explain the pattern of trade between two countries.  What is meant by pattern of trade? Suppose India exports garments, gems and jewellery and a few other products to the United States, while the latter exports computer parts, such as hard disks, and other machines to India. This pattern of export and import of goods is known as the pattern of trade. The theory of international trade explains why such a pattern emerges and lists the factors which cause such a pattern. Trade between two nations is not just in goods. Trade in services is also quite important. If the United States provides banking and insurance services to the Indian citizens, say to the Indian exporters and importers, and if these services are provided from the United States, then it is to be regarded as the U.S.  Export of services to India. There are two main theories on pattern of trade: the classical or the Ricardian theory and the neoclassical theory or the Heckscher-Ohlin-Samuelson theory.

The second objective of trade theory is to explain the pattern of specialization. A pattern of specialization tells us the kinds of products and their quantities a country would produce. In the above example, India would produce garments, gems and jewellery and other products and the United States would produce computer parts and other machines. India may or may not produce computer parts and machines which USA would produce and similarly USA may or may not produce garments and the gems and jewellery. The pattern of trade and the pattern of specialization will depend on the model you are using to explain these patterns. If you are using the Ricardian theory then you come to the conclusion that USA would not produce garments or gems and jewellery in which India has specialized. But if you are using the neoclassical theory then you would say that USA would produce the goods it is importing from India. The domestic industries that produce the goods that the country imports are known as import competing industries (e.g.  Garments for USA computer parts for India) and those producing goods that the country exports are called export industries (e.g.  Computer parts for USA and garments for India). A country however will have industries whose products are neither exported nor imported and the goods produced by them are called non traded goods, such as domestic transportation, electricity, etc.

The third objective of trade theory is to show that international trade is mutually beneficial to the trading countries. A country which is not engaged in trade with any country is in a state of autarky. The theory says that trade is better than autarky under any circumstances. However, how much trade a country should have and whether a country should restrict the quantities of exports and imports by customs duties, tariffs, quotas and taxes is quite another matter.