Which Best Explains Why International Trade Agreements Are Beneficial

Kei-Mu Yi of the World Bank notes that standard business models were very much responsible for the growth of world trade until the mid-1970s, but that they could not explain the growth of trade since then. [21] However, a model that takes supply chains into account explains the growth of trade, and he believes that such vertical specialization now accounts for about 30% of world trade. Free trade agreements should stimulate trade between two or more countries. Strengthening international trade has the following six main advantages: both countries recognize that they can produce more if they focus on products with which they have a comparative advantage. Country A began to produce only wine, and Country B began to produce only cotton sweaters. Each country can now create a specialized production of 20 units per year and negotiate equal shares of the two products. As a result, each country now has access to 20 units of the two products. The comparative advantage theory starts from a world where trade between countries is balanced or, at the very least, where countries have a trade surplus or trade deficit, whether cyclical and temporary. [29] The easing of the assumption that “international trade between nations is balanced could lead a loss-making nation to import certain raw materials in which it would have a comparative advantage and which would in fact export with balanced trade,” says Dominic Salvatore. But he doesn`t see it as a major problem, “because most trade imbalances in relation to GNP are generally not very large.” [30] Indeed, huge benefits have been generated by the U.S. Free Trade Agreements (ATFs) covering 20 countries.

Gomory and Baumol note that, to the extent that countries can create a comparative advantage for products with lower production costs, there are many possible outcomes for business models: “These results differ in their impact on the economic well-being of the countries concerned. Some of these results are good for one country, some are good for the other, some are good for both. But it is often true that the results that are best for a country tend to be bad results for its trading partner. [26] The world has achieved almost more free trade in the next round, known as the Doha Round Trade Agreement. If successful, Doha would have reduced tariffs overall for all WTO members and the emergence of these vast supply chains has a huge impact. This means that the traditional term “country of origin” no longer applies to many products, as many products have many countries of origin. This means that standard trade statistics have limitations, how useful they are in understanding what is really happening in world trade. [22] It has implications for how countries should address economic development, as it means that developing countries must be part of these global supply chains in order to increase the value added in the parts and materials made available to these supply chains.