INTRODUCTION TO ECONOMICS 
Lesson 5   given at Alia College (Mlebourne)


TRADE


WHAT IS TRADE ?


Trade is the voluntary exchange by people of goods and services. In this regard, goods include money. By voluntary is generally meant that the decision to exchange was made by the people concerned, freely, unaffected by force or fraud. Although one can be forced by financial or other necessity to enter into an exchange one would otherwise not wish to transact, this is not usually regarded as rendering the exchange involuntary. Force generally means the application or the threat of the application of actual physical force to your person or property or to the person or property of someone physically or emotionally close to you. If a ruffian insists at knifepoint that you exchange your new shoes for his old worn-out ones or a confidence man persuades you to pay him a large sum of money for a painting he has falsely described as a Picasso, they are not engaging in trade but rather respectively in a forced and a fraudulent exchange. The distinctions can become fine. This is a legal problem. 


Trade is an economic function but one much affected by political, legal, cultural, psychological and other considerations..


WHY DO PEOPLE TRADE ?


People trade with each other to obtain goods or services which they desire and which they cannot produce or otherwise obtain for themselves, either at all or as cheaply, whether in terms of time, effort or money. 


Apart from satisfying their immediate wants by the acquisition of services, trade is one of the 4 ways, generally accepted as valid, that people can acquire property; the other 3 being producing it personally, [whether by making or discovering it], by gift and by inheritance. Alternatively people can acquire goods and services by taking them, in a myriad of ways, from other people. This tends to be regarded as invalid.


COMPARATIVE ADVANTAGE AND DIVISION OF LABOUR


Trade stems from inequality and difference. If humans were identical with equal attributes, living in the same circumstances, then trade would not exist. By definition each would have the same desires and conditions and see no need to trade. It is because humans are unequal with different needs, training, outlooks, skills, desires and so forth and live in different circumstances that there is trade. Trade tends to reduce inequality and to alleviate the consequences of the different circumstances in which humans live.


The law of comparative advantage operates to encourage people as producers to concentrate, in order to maximise their returns, on the production of whatever goods or services that they have the most comparative advantage or the least comparative disadvantage with respect to other people, and to engage in trade with such other people to satisfy their other wants. 


Concentrating on products in which one has a comparative advantage leads to an increase in trade. This in turn leads to innovation and enables greater Division of Labour [or specialization] to occur. The most famous example of this is the description of the pin factory by Adam Smith, where the individual production processes of pin making are performed by different workers, thereby expanding production of pins manyfold. Smith saw the increasing Division of Labour as the secret to worldwide prosperity. Marx on the other hand saw it as the cause of the brutalization and degradation of the worker, leading to his or her alienation..


BENEFITS OF TRADE


By definition, any trade is subjectively of mutual benefit to the parties. The outcome of any trade is that everyone involved is better off. It is thus a positive-sum game. It follows that the more that members of a community engage in trade the better off economically that community will be. Trade is the hallmark of prosperity. Most economists accept this assessment. 


DOMESTIC AND INTERNATIONAL


It is a matter of dispute between economists as to whether international trade differs in kind from domestic trade. The better view seems to be that in terms of economic theory there is no difference but that there are a number of effective factual differences. Between nations there are likely to be differences in currency and legal systems. Social, religious and cultural attitudes to trade can differ significantly as well as taxes and regulations. Nationalism and other psychological and political considerations can affect trade once it crosses national boundaries. Last but not least is the question of whether a nation is free trade or protectionist. Largely as a result of these factors, International Trade tends to be studied as a separate subject within economics.


ANTI-TRADE


If, as economic theory would suggest, trade was an absolute benefit then it would seem to follow that any measure tending to prevent or inhibit it would be detrimental to the general welfare. There is no shortage of such measures. Prima facie, this appears to be irrational. Some economists believe, that in certain circumstances at least, trade can be detrimental overall. It can be argued that the test of whether any trade is beneficial should be objective and judged by others, rather than by the subjective view of the parties involved. Most measures preventing or inhibiting trade are non-economic in origin. Contrary economic arguments are subject to being stigmatised as economic rationalism. Globalisation, which presents as a modern phenomenon, raises quite a number of trade issues, some at least of which are quite old. Another current issue is airline viability, with many world airlines seemingly about to collapse financially. The main reason for the uneconomic proliferation of airlines has been the apparent necessity for every country to have its own airline, regardless of cost.


FREE TRADE AND PROTECTIONISM


One of humankindís most pervasive arguments is the ongoing struggle between Free Traders and Protectionists. In the early history of the Commonwealth of Australia, the trade debate ranked second in importance, behind only the immigration debate ie. White Australia. The overwhelming weight of economic theory is in favour of free trade, which is the political policy that holds that, in the interests of the general welfare, governments should never interfere with the flow of trade in any way, whether to encourage or to restrain it. In political debate, the Free Traders tend to lack an organized body of supporters. Everybody, as a group, does not constitute a constituency.
In Australia, the Protectionists, largely dominated by a protectionist Victoria, triumphed in 1908 over the Free Traders, lead to lesser extent by a free trade New South Wales, with the introduction of a protectionist tariff. Australia became a protectionist country, which it has largely remained.
Most countries today are protectionist. The leading modern exponent of free trade is the former British colony of Hong Kong [now part of China], and to a lesser extent, Singapore. The World Trade Organization [WTO], the World Bank, and the International Monetary Fund [IMF] pay deference to free trade as an economic theory. The emerging world trade blocs such as the European Union [EU] and the North American Free Trade Association [NAFTA] tend to be free trade internally and protectionist to the outside world.


         David Sharp
           13 November 2001


Return to the Home Page