Links Between Trade & the World Economy (College Board AP® Human Geography)

Complementarity & Comparative Advantage

• Complementarity and comparative advantage are two key concepts that form the foundation of international trade and show the economic interdependence between locations

Complementarity

• Complementarity exists between two places if each has an item the other wants

• The higher the demand for goods outside of where it is produced, the greater the trade will occur

  • An example of complementarity would be coffee regions exporting their coffee beans to areas that cannot grow it while importing manufactured goods

Comparative advantage

• Comparative advantage exists when trading partners each specialize in producing the goods they can most easily and cheaply produce

• This specialization encourages increased trade

  • An example of comparative advantage is coffee production in Brazil

  • Brazil’s environment, soil, and local experience make growing coffee a comparative advantage for the country

  • Other countries, such as the United States, could grow coffee, but could not do it as efficiently as Brazil does

  • Therefore, Brazil has a comparative advantage in coffee

Neoliberal Policies & Trade

• Neoliberal policies favor privatization over government control in economics as well as the reduction of barriers to trade

• Neoliberal economic policies are based on giving the state the smallest role possible in economics

  • These policies assume that free markets without significant government regulation are best for economic, political, and social development

• Neoliberal policies seek to lower barriers to trade, include calling for the reduction or elimination of:

  • customs duties

  • import and export taxes

  • tariffs to make it easier to trade

Supranational organizations

• Several economic supranational organizations have been created to increase free trade between countries

• Free trade agreements between countries eliminate barriers to trade and facilitate the movement of goods and services between the countries

• Examples of these supranational organizations include:

  • the European Union (EU)

  • Mercosur

  • Organization of Petroleum Exporting Countries (OPEC)

• The EU is a politico-economic union of 27 member states in Europe

  • The EU acts as a free-trade zone without any internal customs tariffs or barriers to trade or travel between member nations

• Mercosur is a South American trade bloc focused on providing for the free flow of goods, capital, services, and people among its member states

• OPEC coordinates global oil prices between member nations

Government Initiatives & Economic Development

• Government policies play a crucial role in shaping economic development by influencing trade, investment, and industry

Government at a local scale

• At a local scale, governments can provide support for local businesses

  • For example, governments may fund infrastructure projects to improve transportation and communication or offer tax incentives to entice businesses to their area, both of which positively affect economic development

Government at a national scale

• At a national scale, governments enact trade policies to regulate imports and exports

  • These policies may aim to increase trade by creating free trade agreements

  • Governments may enact import or export taxes or tariffs to try to prevent the importation of goods and protect local businesses

  • National governments might also enact policies to encourage particular sectors of the economy, such as technology, manufacturing, or agriculture

Tariffs

• Tariffs are a particular type of tax imposed on imported goods in an attempt to protect domestic businesses by making imported goods more expensive than their domestic counterparts

  • Tariffs are generally enacted to support domestic businesses

  • They may also lead to higher prices for consumers, reduced access to imported goods, and trade wars

Impact of Global Financial Crisis

• Globalization has led to an increased interconnectedness between the world’s economies

  • The economic events in one country can have far-reaching impacts on other countries

• This growing interdependence can be seen through the effects of:

  • global financial crises

  • policies of international lending agencies

  • various development strategies used by countries and organizations

• Global financial crises, such as stock market crashes or debt crises, affect multiple countries due to economic interdependence

• A crisis in one country can quickly spread to others, affecting global trade, investment, and financial stability

  • The 2008 global financial crisis began in the United States with the collapse of the housing market and banking sector, but quickly spread to Europe, Asia, and beyond, causing worldwide recessions

• Two supranational organizations, the International Monetary Fund (IMF) and the World Bank, attempt to regulate and stabilize global financial issues

  • The IMF provides short-term financial assistance to countries facing economic crises, often with strict conditions about restructuring their economies

  • The World Bank focuses on funding long-term development projects, such as infrastructure (building roads, schools, hospitals) and poverty-reduction programs

Strategies of Development

• Development strategies, such as microlending, investment in infrastructure, and loans attempt to promote local economic growth and reduce poverty in developing countries

  • The IMF provides loans to countries in danger of economic crisis to keep international trade functioning. 

  • Though IMF loans can be helpful to developing countries, they often also come with strict provisions that may hamper local economic development 

• Microlending refers to the practice of making loans of small amounts to poor borrowers in developing countries who would not ordinarily be able to secure credit

  • Microloans are intended not only to support entrepreneurship and alleviate poverty but also to empower women and improve conditions in the wider community