Why do countries seek to make trade deals?
David Ricardo, a London-based economist born in 1772, came up with a theory that encourages specialisation and trade between countries.
It is based on the principle of lowest opportunity cost. An opportunity cost is the consequence of choosing something, for example to produce cars. We choose cars if we are very productive at making them, more so than other things we could choose to make with the same economic resources. But we need trade next: it enables us to exchange our surplus cars with another countrys surplus products, for example steel. This specialisation results in a rise in world productivity. It enables everyone in the world, on average, to consume more than their country would realistically be able to produce by itself.
An alternative would be self-sufficiency, making a broad range of goods including those at which the country is not particularly productive. An example in Ricardo’s time were the protectionist British Corn Laws which restricted cheap imports. Self-sufficiency is easier for countries with varied resources or climates, such as India or the USA. Less resource-diverse countries like the UK need to rely on exchange relatively more. International trade has many advantages, such as greater choice and cultural enrichment, but ignores some costs, for example the pollution caused by transporting the goods.
