The terms of trade are an indicator of the relationship between exports and imports. The higher the price of exports compared to the price of imports, the better the terms of trade will be. An economy that does not engage in trade with other countries and relies solely on their domestic products is known as a closed economy or an autarkic economy. In contrast, an open economy is beneficial because its citizens can choose from a variety of goods, and these goods will be reasonably priced due to competition in world markets. Countries that increase their participation in international trade will essentially experience growth. Although not only through trade, a country can see more growth in its GDP, but also through foreign direct investment and foreign portfolio investment. The latter is associated with short-term investments, while others are associated with long-term investments. International trade will create labor-intensive jobs for poor countries.
For example, according to United States statistics, the textile and clothing industries are labor-intensive and experience a lot of foreign competition. The regulation applied to trade has a huge impact on jobs in this industry. In 2005, members of the World Trade Organization canceled agreements that set quotas on clothing and textiles. US trading partners, especially China, were involved in the process. When the quotas expired in 2005, it allowed more clothing and textiles to enter the US. Although some bilateral quotas have been restored between the US and China, imports have increased substantially. Low-skilled workers who did a lot of the industry's labor-intensive jobs, such as clothing fabrics, have been out of work as businesses have relocated their factories to countries with cheap labor.
Occupations that require higher qualifications, such as design work, as well as custom-made or high-quality domestic goods, have not been affected by trade to the same extent. Businesses that have been technologically advanced in the industry, such as textiles, carpets, and many others, are now internationally competitive and it is highly likely that their exports will increase as a result of liberalization. textile trade. This would be more beneficial for countries that have a comparative advantage in certain commodities. A country will have the advantage that it can produce a service or good at minimal cost or use fewer resources for its production than its competitors. For example, suppose a worker in Mexico can produce 30 rubbers or 50 rulers in one day.
An employee in Korea produces 20 rubbers or 70 rulers per day. Since a Korean worker produces more rulers than a Mexican worker, this means that it will be cheaper to produce rulers in Korea than in Mexico. In this example, Korea has the advantage. In world trade, we have restrictions that governments place on the trading industry. Restrictions can be applied in the form of taxes, quotas, etc. Taxes paid on imported goods are known as tariffs. Quotas define the maximum amount of goods allowed to be imported, in most cases for a given period. Governments impose import restrictions to minimize foreign competition in domestic industries, maximize domestic employment, generate revenue for the government, and alleviate restrictions placed by foreign governments on their exports.
There are many ways in which one can get an idea of the state of the trading industry, one of the most commonly used is the balance of payments. The BOP consists of the current account and capital account. The current account will show the difference in the movement of capital on intangible assets such as bonds, stocks, foreign exchange, etc. Capital accounts reflect the net flows of tangible assets such as goods, military equipment, etc. In principle, the BOP should to be balanced, the inflows should equal the outflows, but in reality this is never the case because the information used to register it comes from different sources. In the past, we have witnessed the creation of international trade institutions that would be responsible for monitoring the outlook for the world economy and, most importantly, for ensuring fairness in international trade. This rests on the introduction of the International Monetary Fund and the World Bank in 1944.
As we stated earlier, the current account is rarely in balance, and sometimes some countries run deficits. This will require countries to adopt policies that will rein in domestic demand. However, this will have a negative impact on domestic employment. Trade organizations were created to help countries and could be subject to these adverse conditions. Money will be borrowed under certain circumstances. These trade organizations will do their best to help countries address the challenges of structural reform in their economies, and they also collect data on the international economy to provide policy advice and identify potential economic risks. As countries become more interconnected, a single economy could have a spillover effect on the wider global economy, as evidenced by the Ukraine invasion and its impact on global value chains. The IMF is ready to keep these risks under control.