This project has been funded with support from the European Commission (226388-cp-1-2005-1-de-comenius-c21). This publication reflects the views only of the authors

Friends of the Earth (FE): The organization which was established in 1971 mostly deals with environmental problems. Organization has some targets about climate change, recycling, energy-saving houses, organic agriculture and the protection of nature. Organization runs with the ideas of “there is tomorrow”, “everyone gets a fair share” and “change the rules for a better economy”. In this framework, the organization opposes enterprises and globalization in case they affect environment negatively.

4. Theories of International Trade

International trade deals with good, service and payment flows among countries and the policies that regulate these flows and their national wealth effects. In short, international trade deals with physical good exchange among countries and the problems arisen from these transactions; international finance deals with the policies that regulate foreign trade markets, balance of payments and imbalances in the payments.
Theory of international trade can be accepted as the expansion of the theory of economics so that it covers particular problems arisen from international trade.
The theory of international trade academically was firstly discussed by Adam Smith and his famous book shortly known as Wealth of Nations in 1776. Smith explained classical trade theory and showed that trade is profitable for both sides trading. The win-win character depicted by Smith contradicts the then prevailing view. The prevailing view until Smith’s theory was Mercantilism. According to Mercantilist perception “wealth of nations” is measured with precious metals, gold and silver, and with productive capacity countries have. Therefore each nation desires the highest amount of gold and perceives export as beneficial but imports (except imports of raw materials) as harmful. Therefore trade is a win-lose game. While exporters gain, importers lose. Hence the win-win perception of Smith’s absolute advantage is of great importance.

4.1. Smith and Ricardo: Classical View

The first scientific steps of the theory of international trade were taken by Adam Smith (1776, The Wealth of Nations: An Inquiry into the Nature and Causes) and David Ricardo (1817, On the Principles of Political Economy and Taxation). They have some assumptions in doing so. They are:

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  Real sector and monetary changes are independent of each other (neutrality of money).
  
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  All the prices (and foreign exchange rates) are elastic and determined under perfect competition.
  
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  The amount of the factors of production is constant and all the factors are fully utilized (full-employment).
  
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  Factors of production are mobile within countries but immobile among countries.
  
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  Level of technology (therefore production functions) is same within a country but may vary among countries.
  
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  Consumer tastes are constant and international trade does not affect tastes.
  
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  The distribution of income is constant.
  
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  There are no trade barriers in terms of transportation, knowledge and communication.
  

Smith think that total wealth of the world is not constant, foreign trade can increase the wealth of both parties –not just one- therefore the wealth of world through the productivity increase of world recourses by division of labor and specialization and with the help of assumptions tries to explain international trade with absolute advantage theory. Smith claims that a country that can produce more output with one unit of labor has an absolute advantage in that good. For example, if Turkey it will be beneficial for both parties that Germany specializes in steel production and Turkey in wheat production and trade with each other because Germany produces 1 unit of wheat with a cost of 2.5 units of steel. However, Turkey can produce 1 unit of wheat with a cost of only 0.5 unit of steel. Therefore an international trade with a price of 1 unit of wheat=1.5 units of steel will be profitable for both parties.
On the other hand Ricardo claims that absolute advantage theory constrains international trade, it can not explain the trade when one country has absolute advantages in the production of both goods; instead he developed comparative advantage theory. Accordingly, if Turkey can produce only 10 units of steel or 40 units of wheat with one unit of labor while Germany can produce 50 units of steel or wheat, Smith claims that Germany has absolute advantage in the production of both goods and there won’t be trade, but Ricardo claims that even in this case trade will be beneficial for both parties. Germany can produce 1 unit of wheat with a cost 1 unit of steel. On the other hand Turkey produces 1 unit of wheat with a cost of 0.25 unit of steel, that is to say Turkey can produce wheat with a comparatively lower cost. In such a case an international trade with a price of 1 unit of wheat=0.6 unit of steel will be profitable for both parties.
Classical trade theory has been criticized because of its simplifying assumptions. Although they are aware of the factors of production except labor, namely capital and natural classical economists choose to perceive natural resources as endowment and capital as accumulated labor. Therefore classical trade theory is based on labor theory of value and excludes other factors of production. Another criticism is that classical trade theory covers supply-side analysis but not the demand-side. Besides it lacks technologic developments, mobility of the factors of production, product differentiation and imperfect competition that contemporary theories cover.