Then Adam Smith challenged this dominant thought in The Wealth of Nations of 1776. [2] Smith argued that if one nation is more efficient at making one product than another country, while the other nation is more efficient at making another product, both nations could benefit from trade. This would allow any nation to specialize in the production of the product, where it has an absolute advantage, thus increasing overall production compared to what it would be without trade. This idea implied a very different policy from mercantilism. This meant less government involvement in the economy and reduced barriers to trade. Kei-Mu Yi of the World Bank notes that the usual economic models were very well responsible for the boom in world trade until the mid-1970s, but cannot explain the growth of trade since then. [21] However, a model that takes supply chains into account explains the growth of trade, and it estimates that this vertical specialization now accounts for about 30% of global trade. [15] A second type of model commonly used is the gravity model, which assumes that large economies have greater attractiveness to trade flows than small economies and that proximity is an important factor influencing trade flows. And another common type is a partial equilibrium model that estimates the impact of a trade policy measure on a particular sector, not on the economy in general. Partial equilibrium models do not take into account connections to other sectors and are therefore useful when contagion effects are likely to be negligible. However, partial equilibrium models are more transparent than CGE models, and it is easier to see the effects of modified assumptions. A basic accounting concept in the international economy is that a country`s overall balance sheet, which consists of both the current account and the balance of capital transfers, must be balanced.

This means that if the current account is in deficit, the country`s capital account must show a surplus of the same amount. The capital account consists of purchases or sales of foreign currency by the central bank or by individuals. This basic accounting principle can be considered as follows: however, economic theory has evolved considerably since the time of Adam Smith, and it has evolved rapidly since the founding of the GATT. To understand U.S. trade agreements and how they should unfold in the future, it is important to look at economic theory and see how it has evolved and where it is today. Western economic theory has also changed in recent years to reflect the fact that since the early 1970s, world trade has grown much faster than overall economic growth. In 1973, the U.S. export-to-GDP ratio was 4.9 per cent, and by 2005 the ratio had more than doubled to 10.2 per cent. For the world as a whole, this rate was 10.5 per cent in 1973 and rose to 20.5 per cent in 2005.

The objective of bilateral trade agreements is to expand access between the two countries` markets and increase their economic growth. Standardized business processes in five general areas prevent one country from stealing innovative products from another, throwing away low-cost products, or using unfair subsidies. Bilateral trade agreements standardize regulations, labour standards and environmental protection. However, a number of countries – including Japan, South Korea, China and a few other Far Eastern countries – have adopted a neo-mercantilism model in which they seek to develop through aggressive export expansion combined with a very moderate reduction in import barriers. These countries seek to develop powerful export industries by initially protecting their domestic industries from foreign competition and providing subsidies and other forms of support to stimulate growth, often including currency manipulation. Economists do not deal with such cyclical trade deficits or surpluses. In addition, they do not worry when a deficit occurs because the country borrows heavily abroad to finance investments that are subsequently repaid. During the nineteenth century, the United States was indeed in exactly this position when it went into debt to build railroads across the continent, steel mills, and other long-term investments. However, this is not the current situation in the United States.

Today, it borrows heavily from other countries to finance short-term consumption, such as the latest and greatest HDTVs in Japan or South Korea, and these purchases do not generate revenue to pay off its debts in the future. The benefits of unilaterally removing barriers to trade are particularly evident in cases where the country does not manufacture the product; In these cases, the removal of barriers to trade increases consumer choice. (However, as mentioned above, an exception occurs in situations where the removal of a barrier to trade in a raw material or component not produced by the country increases the effective level of protection of the finished product.) This would suggest that the mercantilists were right, that a nation would be well advised to restrict imports. However, almost all economists today would reject this conclusion, and in fact, many economists believe that lowering its trade barriers benefits a country, whether or not the country`s trading partners reduce their barriers. Adam Smith and many economists after him argue that the purpose of production is to produce goods for consumption. Stephen Cohen and colleagues put this argument this way: « Theories of comparative advantage (classical and neoclassical) imply that trade liberalization is always beneficial to consumers in any country, whether or not the country`s trading partners respond by dismantling their own barriers to trade. From this perspective, the emphasis on the mutual dismantling of trade barriers can be seen in most real trade liberalization efforts. is out of place. [12] First, the results of a model depend on the assumptions underlying it, .

B.dem such as the extent to which imported and domestically produced products can be replaced, or whether or not there is perfect or imperfect competition. Different assumptions can lead to a variety of outcomes, not only at scale, but sometimes even in the direction of projected changes. Fourth, Western economic theory assumes that trade will be reasonably balanced over time. If this is not the case, this indicates that the deficit country will import products where it would normally have a comparative advantage; If these products are located in areas where production costs are decreasing, the industry could lose its ability to compete in global markets over time. Another important concept in international trade theory is the concept of the « terms of trade ». This is the amount of exports needed to get a certain amount of imports, the fewer exports needed, the better it is for the country. The terms of trade can change, either in favour of a country or by reducing its well-being. Gomory and Baumol note that because countries can create a comparative advantage in goods with falling 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 best results for a country tend to be bad results for its trading partner. [26] Thirty-one years after the publication of The Wealth of Nations, David Ricardo introduced an extremely important change in theory in his Book On the Principles of Political Economy and Taxation, published in 1817.

[3] Ricardo noted that trade between nations will take place even if a country has an absolute advantage in the production of all traded products. the rate of duty that maximizes the net benefit resulting from the improvement in the country`s trading conditions, compared to the negative effects resulting from the reduction in the volume of trade. When the terms of trade of the country imposing the tariffs improve, those of the trading partner deteriorate because they are reversed. With both a lower volume of transactions and the deterioration of the terms of trade, the welfare of the trading partner is definitely in decline. .