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Other Benefits of Free International Trade
Along with the gain that arises from producing and trading according to comparative advantage,
free international trade results in other benefits:
1. Free international trade extends markets, which allows nations to take more advantage of
economies of scale and specialization of labor, and increases the potential returns to
innovation.
2. Free international trade increases competition which compels domestic firms to increase their
efficiency and to improve the quality of their products.
3. Free international trade speeds the flow of technological advances as firms are exposed to the
improved production techniques of their foreign competitors and are motivated to adopt (or
surpass) these improved production techniques. Nations that become isolated from other
nations fall behind technologically.
Example 4: Both China and India had relatively closed economies until recent decades. Both
nations lagged behind technologically and had economies dominated by large and inefficient
farming sectors. After the nations opened up to international trade in recent decades, they both
made rapid progress technologically. See the appendix on International Trade and Economic
Growth in China and India at the end of this chapter.
4. Free international trade gives consumers access to a greater variety of goods.
5. Free international trade improves international relations. Nations that are engaged in mutually
beneficial trade have a strong incentive to avoid war (and lesser conflicts) that would disrupt
the mutually beneficial trade.
Trade Restrictions
When nations engage in free international trade according to comparative advantage, the nations
benefit overall. But not everyone within the nations may benefit personally (especially in the short
run) from free international trade.
Domestic producers who face increased competition from imports may suffer losses. Thus,
domestic producers may seek governmentally imposed restrictions on trade (especially
restrictions on imports). The two most commonly imposed trade restrictions are tariffs and quotas.
Tariff – a tax on an imported good.
Quota – a legal limit on the quantity of a good that may be imported.
Both tariffs and quotas will reduce the supply of imports. This will allow domestic producers to sell
a greater quantity at a higher price. Domestic producers will thus receive more producer’s surplus
than before the trade restriction. This is the gain to domestic producers from trade restrictions.
Producer’s surplus – the difference between the lowest price a seller is willing to accept and the
price actually received.
But while domestic producers gain from trade restrictions, domestic consumers lose. The
domestic consumers will buy a lesser quantity at a higher price. Domestic consumers will thus
receive less consumer’s surplus than before the trade restriction. This is the loss to domestic
consumers from trade restrictions.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Consumer’s surplus – the difference between the highest price a buyer is willing to pay and the
price actually paid.
16 - 3 International Trade