Introduction
It is important to note that the current economic system is highly globalized and interconnected, which makes it critical to understand and explore international trade frameworks and world finance. The assessment of current literature on the subject revealed that international trade allows to a significant increase in the development of the enterprises of countries, but there is an increased susceptibility to uneven development, economic disturbances, and public as well as environmental risks.
Main body
The gradual transition of the isolationist nations from protectionism towards globalized and interrelated economies is manifested in the fact that international trade and finance have become more effective and efficient at production but impose greater risk on the involved parties. In accordance with Adam Smith’s theory of trade of free markets, the framework has three major interpretations. Firstly, the neoclassical theory of absolute advantage focuses on how each nation focuses on the production of a few commodities in order to bring more efficiency. It states that “each country will specialize in the production of those commodities that it can produce with less cost and in which it has thus an absolute (production) advantage” (Schumacher, 2020, p. 21). In other words, “once countries start trading, existing resources are reallocated and used more efficiently, increasing global production” (Schumacher, 2020, p. 21). Therefore, absolute advantage sees each country as unequal in terms of production of all goods because some have more raw materials, some have more workforce, and some are more inventive with technology. All of these differences result in a more efficient global economy.
Secondly, in the case of increasing returns interpretation, the specialization process is viewed as a consequence of trade. It is stated that “increasing returns and cumulative causation result in a dynamic development, which leads to ever more specialization and, thus, growing differences in the production structures of countries” (Schumacher, 2020, p. 21). Thirdly, the uneven development interpretation focuses on the notion that the theory reinforces inequality of development. It is stated that “due to an initial backwardness, poor countries are forced to specialize in the production of agricultural commodities, which are “non-dynamic-returns goods” (Schumacher, 2020, p. 22). Therefore, the three interpretations are not necessarily mutually exclusive since international trade exhibits all of these forces. Modern nations are highly efficient at what they produce, developing nations have a hard time entering more advanced markets, and specialization can be seen in many nations.
However, despite the numerous advantages of international trade and finance, there are risks on top of the already mentioned uneven development, which need to be addressed. For example, the financial crisis of 2008 revealed major dependencies of global economies on each other, where a collapse of a single market in one country had implications worldwide. International banks carry such risks, and a study shows that there is a “global use of letters of credit and documentary collections,” where the “2007/2008 financial crisis led to a sharp increase in the number of LCs sent relative to trade” (Niepmann & Schmidt-Eisenlohr, 2017, p. 125). In other words, despite the measures undertaken to prevent future crises, businesses and international enterprises, including banks, are utilizing risky financial instruments.
There are also public health and environmental risks associated with international trade and finance. Climate change and pollution are also relevant in the face of global economic development, where it is stated that “the relocation of production across countries counteracts national mitigation policies and may negate ostensible achievements in decoupling impacts from economic growth” (Wiedmann & Lenzen, 2018, p. 314). The COVID-19 outbreak revealed how supply chains and global production could lose their efficiency due to the restriction of the movement of goods and people. Another distinguishing feature of global trade during the COVID-19 period is the change in consumer behavior and the transition of trade, entertainment, and work activities almost entirely online. The pandemic has become an impetus for the improvement and modernization of the infrastructure of existing online platforms and the digitalization of those areas in which such processes have not previously occurred. The transfer of employees to a remote work model has created a completely different nature of work and employee comfort.
At the same time, not only the systems of communication in society have changed, but also the role of Internet commerce associated with this trend, providing users, not limited by the ability of suppliers, with access to the world market. Moreover, the spread of Industry 4.0 is predicted in the near future, such as the mass adoption of cyber-physical systems, in the production and service of human needs, in view of the fact that enterprises tend to be prepared for new production disruptions and rely less on human workers.
Conclusion
In conclusion, global trade and finance is a framework based on efficiency and effectiveness through interconnectedness and specialization. However, such a system is more complex and intricate, which carries greater risks for all involved parties. The sources of disturbance are financial institutions, public health, and environmental factors. International trade is a system of international commodity-money relations, consisting of the foreign trade of all countries of the world. Thus, it is an important component of the economy of almost all nations.
References
Niepmann, F., & Schmidt-Eisenlohr, T. (2017). International trade, risk and the role of banks. Journal of International Economics, 107, 111–126. Web.
Schumacher, R. (2020). Altering the pattern of trade in the wealth of nations: Adam Smith and the historiography of international trade theory. Journal of the History of Economic Thought, 42(1), 19–42. Web.
Wiedmann, T., & Lenzen, M. (2018). Environmental and social footprints of international trade. Nature Geoscience, 11(5), 314–321. Web.