Why Do Nations Trade?

One might argue that the best way to protect workers and the domestic economy is to stop trade with other nations. Then the whole circular flow of inputs and outputs would stay within our borders. But if we decided to do that, how would we get resources like cobalt and coffee beans? Canada simply can’t produce some things, and it can’t manufacture some products, such as electronics and most clothing, at the low costs we’re used to. The fact is that nations—like people—are good at producing different things: you may be better at balancing a ledger than repairing a car. In that case, you benefit by “exporting” your bookkeeping services and “importing” the car repairs you need from a good mechanic. Economists refer to specialization like this as an advantage.

Absolute Advantage

A nation has an absolute advantage if (1) it’s the only source of a particular product or (2) it can make more of a product using fewer resources than other countries. Because of climate and soil conditions, for example, France had an absolute advantage in winemaking until its dominance of worldwide wine production was challenged by the growing wine industries in Italy, Spain, the United States, and more recently Canada.

Canada, for example, is a country rich in natural resources such as timber, minerals, and energy. This gives Canada an absolute advantage in the production of goods that require these resources, such as lumber, minerals, and petroleum products. Other examples include:

1. Skilled Labour: Canada has a highly educated and skilled workforce, particularly in fields such as engineering, technology, and healthcare. This gives Canada an absolute advantage in the production of goods and services that require skilled labour, such as high-tech products, medical devices, and software.
2. Agricultural Production: Canada has a large agricultural sector and is a major producer of wheat, barley, and other crops. This gives Canada an absolute advantage in the production of agricultural products, which can be exported to other countries.
3. Location: Canada’s location gives it an absolute advantage in the production of goods that require proximity to large markets, such as the United States. For example, Canada’s automotive industry benefits from its location close to major U.S. markets, which allows for just-in-time delivery and lower transportation costs.
4. Renewable Energy: Canada has vast renewable energy resources, such as hydropower and wind power. This gives Canada an absolute advantage in the production of renewable energy, which is becoming increasingly important in the global economy.

Comparative Advantage

While absolute advantage refers to a country’s ability to produce a good or service more efficiently than another country using fewer resources, comparative advantage refers to a country’s ability to produce a good or service at a lower opportunity cost than another country.

Opportunity cost refers to the cost of producing one good or service in terms of the forgone opportunity to produce another good or service. A country with a comparative advantage in producing a good or service can produce it at a lower opportunity cost than another country. This means that the country is giving up less of other goods or services to produce the good or service in question.

For example, let’s say that Canada and Mexico both produce wheat and corn. Canada has an absolute advantage in producing both wheat and corn because it can produce them more efficiently than Mexico. However, Canada has a comparative advantage in producing wheat because it has a lower opportunity cost of producing wheat relative to corn than Mexico. This means that Canada can produce wheat at a lower cost in terms of forgone corn production than Mexico, and vice versa.

In international trade, countries will often specialize in producing goods or services in which they have a comparative advantage and trade with other countries for goods or services in which they have a higher opportunity cost of production. By doing so, both countries can benefit from trade and increase their overall economic welfare. While absolute advantage and comparative advantage are related concepts, they refer to different aspects of a country’s ability to produce goods and services efficiently and effectively in the global marketplace.

Comparative Advantage and Opportunity Cost ^[1]

The Fear of Trade and Globalization

The continued protests during meetings of the World Trade Organization and the protests during the convocations of the World Bank and the International Monetary Fund show that many people fear world trade and globalization. What do they fear?

Learn More

While job losses have occurred in Canada due to imports or production shifting abroad, job losses can occur due to a variety of reasons, including changes in consumer preferences, technological advancements, and global competition, among others. Moreover, the impact of importing or outsourcing on employment can vary depending on the industry, region, and type of job.

It’s also worth noting that while trade can lead to job losses in some sectors, it can also create job opportunities in other sectors. For example, Canadian firms that export goods and services to other countries can create jobs in areas such as manufacturing, logistics, and marketing. Overall, the impact of international trade on employment is complex and can vary depending on a range of factors.

Outsourcing

Outsourcing, which is the practice of contracting work to an external organization or individual, has had both positive and negative impacts on Canada’s economy and workforce.

• On the one hand, outsourcing has enabled Canadian companies to reduce their costs and increase their competitiveness in the global marketplace. By outsourcing certain business functions, such as manufacturing, customer service, and information technology, companies can take advantage of lower labour costs and access specialized expertise.
  .
• On the other hand, outsourcing has also led to job losses and wage stagnation in certain sectors. For example, the outsourcing of manufacturing jobs to countries with lower labour costs has led to significant job losses in Canada’s manufacturing sector. Similarly, the outsourcing of customer service and IT jobs to countries such as India has led to concerns about the impact on Canadian workers and the quality of customer service.
  .
• Moreover, outsourcing can also lead to negative social and environmental impacts, such as poor working conditions, low wages, and environmental degradation, in the countries where the work is outsourced.

In response to these concerns, the Canadian government has implemented various policies and programs to support workers who have been affected by outsourcing and other forms of job displacement. These include employment insurance, training and education programs, and support for small businesses and entrepreneurship.

The impact of outsourcing on Canada’s economy and workforce is complex and multifaceted. While it has enabled Canadian companies to compete in the global marketplace, it has also led to job losses and other negative impacts. It is important for policymakers, businesses, and workers to work together to find ways to ensure that outsourcing is conducted in a responsible and sustainable manner that benefits all stakeholders.

The Benefits of Globalization

A closer look reveals that globalization has been the engine that creates jobs and wealth. The benefits of global trade include the following ^[2]:

• Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage. Living standards can increase faster. One problem is that big G20 countries have added more than 1,200 restrictive export and import measures since 2008.
  .
• Global competition and cheap imports keep prices down, so inflation is less likely to stop economic growth. However, in some cases, this is not working because countries manipulate their currency to get a price advantage.
  .
• An open economy spurs innovation with fresh ideas from abroad.
  .
• Through the infusion of foreign capital and technology, global trade provides poor countries with the chance to develop economically by spreading prosperity.
  .
• More information is shared between two trading partners that may not have much in common initially, including insight into local cultures and customs, which may help the two nations expand their collective knowledge and learn ways to compete globally.