International trade and globalisation

Countries trade for the same reason people do: specialising and exchanging makes everyone able to consume more than they could produce alone. Some goods can only be produced in certain places, such as coffee or oil, but most trade happens because countries are better at producing some things than others.

Trade has shaped history for thousands of years, from the Silk Road and Indian Ocean networks to the Atlantic economy. Today international trade in goods and services amounts to well over half of global economic output.

Adam Smith argued in 1776 that countries gain by specialising in what they produce most efficiently. David Ricardo went further in 1817 with the idea of comparative advantage: even if one country is better at producing everything, both countries still gain by specialising in the goods where their relative advantage is greatest.

Ricardo's example involved England and Portugal producing cloth and wine. Portugal could make both more efficiently, but it gained more by concentrating on wine and trading for cloth, freeing resources for what it did best. Comparative advantage remains one of the central ideas in economics.

• Tariffs: taxes on imported goods that raise their price.
• Quotas: limits on the quantity of a good that can be imported.
• Subsidies: government payments that help domestic producers compete.
• Regulations and standards that can intentionally or unintentionally block imports.
• Governments use barriers to protect jobs, new industries or national security, but they usually raise prices for consumers.

After the Second World War, countries created institutions to encourage trade and prevent a repeat of the protectionism of the 1930s, which had deepened the Great Depression. Tariffs fell through successive negotiations, and the World Trade Organization was established in 1995.

Container shipping, introduced in the 1950s and widely adopted later, drastically cut shipping costs. Combined with cheaper communications and China's entry into the World Trade Organization in 2001, it enabled global supply chains in which a single product may include parts made in many countries.

Economists broadly agree that trade raises total income and lowers prices. Globalisation contributed to rapid growth in East Asia and a large reduction in extreme poverty worldwide.

The gains, however, are not evenly spread. Workers in industries exposed to import competition can lose jobs, and research on the effects of Chinese import competition on US manufacturing regions found long-lasting job losses concentrated in particular communities. Many economists argue that the answer is not to stop trade but to support affected workers through retraining, regional investment and social safety nets.

Recent years have seen renewed tariffs and trade tensions, particularly between the United States and China, and growing interest in bringing production of strategic goods such as semiconductors and medicines closer to home. The COVID-19 pandemic exposed how fragile long supply chains can be.

Other debates concern labour and environmental standards in trade agreements, the carbon emissions from global shipping, and how developing countries can use trade to grow while protecting their own industries.