Benefits and Costs of International Trade

Abstract

International trade is a vital element of today’s economies and the current level of development could not have been achieved without continuously lessening the barriers of international trade. However, international trade is currently viewed rather suspiciously both in the society and among policy makers. This chapter provides an overview of the effects of international trade separately on consumers, firms and national economy as a whole. In each case, the potential advantages and disadvantages of international trade are considered based on theoretical models and empirical analyses. The chapter identifies the main channels through which international trade might have positive and/or negative impacts on consumers, firms and national economies. Two main conclusions emerge from this review. First, the gains and losses of freer international trade are materializing unequally in the society. Second, the net positive effect of international trade is non-linear, i.e., the additional benefits of further reducing trade barriers are the lower the lower the initial level of the barriers were. This can explain why policy makers are less and less interested in further reducing the barriers of international trade. The chapter concludes with a collection of questions that need to be evaluated to understand the likely effect of a new free trade agreement.