International Trades

From Thermal-FluidsPedia

International trade has always been a key component of relations among nations and is critical for the economical development of all nations. As we discussed earlier, trades take place because both sides are better off as a result of the transaction. International trade is particularly important because different countries have different resources and therefore, different opportunity costs. In other words, some resources have a comparative advantage over other resources; different countries may be better off putting their resources towards production of one product than another and using trade as a means to acquire their needs—in the process both countries benefit. To make any trade possible, there are middlemen or entrepreneurs that facilitate the transactions, generating profits and at the same time allowing both countries to benefit economically.

Example: Saudi Arabia is a large supplier of oil, but its desert climate is not particularly suitable for agricultural products such as wheat. It costs the Saudi government $5 for every barrel of oil it produces and $50 for a ton of wheat. The United States, on the other hand, does not have large oil resources, but has a high opportunity cost of producing oil ($25 a barrel). US temperate climate and fertile soil is ideal for growing wheat and can produce it at relatively lower cost ($15 per ton). Assuming each country’s production satisfies its own national needs, is there anything gained from trades between the two?

Solution: The volumes of production for oil and wheat and the total cost of production are given in column A for each country. For Saudi Arabia, the cost of production of one ton of wheat is higher than for one barrel of oil. It therefore makes sense for Saudi Arabia to dedicate its resources to the production of additional oil; it can invest all its resources to increase production of oil to 3,000 barrels and buy wheat from the US (Column B), keeping its total production cost the same. By the same token, it makes sense for the US to divert its resources to production of wheat, increasing its volume to 1,250 tons, and to import its oil from Saudi Arabia. Now Saudis can export 150 barrels of their oil to the United States and keep 2,850 barrels for domestic use or sell them to other countries. Without trades it would have cost Saudis $24,250 to produce this amount of these two products (Column C), resulting in a net savings of $9,250 directly resulting from the trade. The United States, on the other hand, buys 150 barrels of oil while selling 200 tons of its wheat to Saudi Arabia, meeting its domestic oil needs and keeping 50 tons of wheat in excess of what it would have without these trades, saving $750. It is clear that both countries have benefited from this trade.

	Saudi Arabia			US
	A	B	C	A	B	C
Production, oil (barrels)	1,000	3,000	2,850	150	0	150
Production, wheat (tons)	200	0	200	1,000	1,250	1,050
Total production cost ($)	15,000	15,000	24,250	18,750	18,750	19,500
Net saving ($)			9,250			750

The example above shows that both countries benefited from free trade with a net benefit that is spread across the society. Free trade, however, is not free of cost. For example, US oil workers may be laid off or must switch to farm work. The reverse is true for Saudi Arabian nationals. As a result, some sectors of the society will be unsatisfied. To counteract the adverse effects of free trade, these groups, through their trade unions, hire lobbyists encouraging lawmakers to enact trade barriers, organize strikes, or boycott a particular good imported from a foreign country. Usually, the cost incurred to these individuals is small compared to the benefit gained by the populace at large, however.

Question: The European Union places a high tariff on food imported from non-EU countries. What would the effect on EU population be?

Answer: Although some jobs are saved as a result of lower imports, the general public will suffer from higher prices of food in EU member countries. With no restrictions on free trades, the EU food prices drop and everybody benefits. The farmers, through political campaigning and advertisement, will try to inform the public of the costs, not the benefits, of free trade. One approach to neutralize the opposition to free trade is by passing on some of the benefits to farmers and those who are directly affected and still making the whole population better off overall through free trade.

References

(1) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

Colander, D. C., Economics, 3rd E., Irwin-McGraw-Hill, 1998.

Bosselman, F., Energy, Economics and the Environment, Second Edition, Foundation Press, 2005.

Energy Economics, Science Direct Elsevier Publishing Company. Publishes research papers concerned with the economic and econometric modeling and analysis of energy systems and issues.

External Links

United States Association for Energy Economics (http://www.usaee.org).

International Monetary Fund (http://www.imf.org).

The World Bank (http://www.worldbank.com).