International Trade and Efficient Resource Allocation


Political leaders in the U.S. and other countries have recently begun showing renewed interest in international trade as part of broader discussions concerned with increasing economic growth. The discussions have been elementary with the view that more exports simply mean more jobs. With U.S. unemployment close to 10 percent and other countries facing higher rates, the narrow focus is not surprising. They are on the right track, but the issue is much broader.

WTO Director-General Pascal Lamy addressed the issue directly last week at the Shanghai Institute of Foreign Trade, “I heard recently an argument according to which during the recovery it would be nonsense to assume that everyone can increase exports.  I am sorry.  Of course, everyone can increase exports if imports also grow!  Thus making the overall resources allocation more efficient which means growth for all.” 

Presidents and Prime Ministers talk about jobs because that resonates with voters. Economists and trade officials talk about the efficient allocation of scarce resources because that is the essence of all trade – be it international, from one region of the country to another or neighbor to neighbor. A barber will trade with his neighbor who repairs shoes because the barber is much better at cutting hair than repairing shoes and vice versus. They have specialized in their professions and trade services using dollars rather than each owning hair cutting and shoe repair tools and doing a poor job of one or the other. A wheat grower in North Dakota buys orange juice from Florida because it would be a waste of resources to construct greenhouses for oranges in North Dakota. Florida is too warm and humid to grow much wheat and trade with North Dakota is a better allocation of scare resources. Producers and consumers in both states are better off because of trade.

International trade is simply an extension of what happens with neighbors and regions of a country. Brazil is the world’s second largest producer of soybeans and trades soybeans and products around the world. It is also the world’s second largest importer of wheat at 6-7 million metric tons annually because it has the same weather patterns as Florida. It could produce more wheat by using additional land for wheat, but that would be an inefficient use of resources that are better suited for soybeans, sugar, corn, rice and cattle. If Brazil did not import wheat, consumers would need to substitute other foods of lesser value to them.

No country has all of the natural resources, technology, manufacturing capabilities and people with skills to perform all the needed work. Many countries spent the 1950s and 1960s trying to operate with only limited participation in international markets and fell behind the growth of more open nations. One measure of the importance of trade is imports and exports as a percent of GDP. Countries with larger land areas and populations often have a lower percentage than smaller countries. In 2008 according to the Organization for Economic Cooperation and Develop (OECD), a group of developed countries, the percentage of trade to GDP for the Netherlands was 72.6 percent, among the highest in the world, and the U.S. was relatively low at 15.2 percent. The total for the OECD countries was 28.9 percent, with Poland at 42.0 percent, Canada 34.3 percent, the UK 30.4 percent, Mexico 29.4 percent, Australia 24 .5 percent, and Japan 17.4 percent.

Trade does expand the number of jobs as it fuels economic growth, but it has a bigger impact on wages as specialization allows workers to earn higher incomes as companies achieve economies of scale. China is going through that phase right now as upward pressure on wages forces companies to seek ways to redesign businesses to maintain profits. More efficient allocation of resources and economies of scale also reduce costs of production so consumers in domestic and international markets get an increase in their standard of living.

Trade is a positive sum activity with buyers and sellers becoming better off. Exporting without importing is not viable long term as Mr. Lamy pointed out. With open trade, market participants are constantly looking for ways to improve resource allocation to the benefit of importers and exporters.

The WTO ruled this week in an electronic products case brought against the EU in 2008 by the U.S., Japan and Taiwan that highlights the importance of trade rules for resource allocation. The case concerns EU tariffs of 8-14 percent on flat-panel computer screens, multifunction printers and certain cable boxes. The Information Technology Agreement of 1996, now with 70 signature nations, eliminated import tariffs on most electronics. The EU argued that technical innovations had resulted in products that were outside the terms of the technology agreement. A WTO trade dispute panel rejected that reasoning. According to the International Technology Information Council, a U.S. lobbying group, global trade in information-technology products is $1.5 trillion annually. Allowing the tariffs to continue would have had a chilling effect on resource allocation and development of new technology.

British Prime Minister, David Cameron, on a trade trip to India brought up the related area of foreign investment. As economies integrate through trade it is natural to also integrate through foreign investment in new markets. India should lower investment barriers because it has a shortage of capital. Increased investments would also make India more competitive in export markets as its industries modernize. Indian officials brought up to Prime Minister Cameron the sensitive issue of immigration because India has many highly trained people who could be more productive in other countries. Mr. Cameron is planning to limit immigration from non-EU countries. He did have the good sense to say that he would consult widely to make sure his actions do not hurt Britain’s economy.

After declining by 12 percent in 2009, the WTO expects trade to increase by 10 percent in 2010, with increases of 11 percent in developing countries and 7 percent in developed ones. As trade expands, both exports and imports, resource allocations will improve benefiting producers and consumers. Now is the time for political leaders to recognize that trade is a positive sum economic activity that is driven by open markets and the free flow of capital and workers.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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