7.6 Trade and the World Economy

Complementarity means one place has something another place needs. Canada has energy and lumber that the United States uses; Brazil grows soybeans that China imports for animal feed.

Comparative advantage, an idea from economist David Ricardo (1817), says each place should specialize in what it gives up the least to produce, even if another place is better at producing everything. Ricardo's example was England specializing in cloth and Portugal in wine. If each specializes and trades, both can end up with more.

Neoliberalism is a set of economic policies favoring free trade, open markets, privatization (selling state-owned companies to private owners), lower government spending and fewer regulations. These policies spread widely from the 1980s.

The World Trade Organization (WTO), founded in 1995 to replace the GATT, sets rules for trade between its 166 members and settles trade disputes. The International Monetary Fund (IMF) and World Bank, both created in 1944, lend to countries in financial trouble or for development projects.

In the 1980s and 1990s, many countries in Latin America and Africa borrowed heavily and then couldn't repay, starting with Mexico's debt crisis in 1982. In return for new loans, the IMF and World Bank often required structural adjustment: cutting government spending and subsidies, privatizing companies and opening to trade. Supporters say these reforms controlled inflation and attracted investment. Critics argue the spending cuts, often called austerity, hurt health care, schools and the poor.

Freer trade has lowered prices for consumers, opened markets for exporters and helped some countries, especially in East Asia, grow quickly. But gains are uneven. Workers in industries exposed to import competition can lose jobs, and countries that export raw materials can stay dependent on volatile prices (7.5).

Crises show how interdependent economies have become. Mexico's 1982 debt crisis spread across Latin America, and the 2008 financial crisis, which began in the U.S. housing market, became a global recession within months. Development strategies cross borders too: microlending programs that began in Bangladesh (7.4) now operate in dozens of countries.

Trade policy keeps changing. The United Kingdom left the EU in 2020, and in 2025 the United States raised tariffs on imports from many countries, a turn toward protectionism (shielding domestic industries from foreign competition). Membership lists and tariff rates change, so always check the date of any figure you use.