Today all nations are part of a global economy and the global economy is basically characterized by specialization and international trade.
But what is specialization? Essentially by producing a narrower range of goods and services that a country uses, the country must engage in trade to acquire the goods and services that it does not produce .This is what enables international trade. Therefore international trade is the outcome of specialisation among countries.
Trade specialization provides conditions necessary for one other and in that absence of specialisation there would be little trade. The Economy therefore elaborates that a country should specialize in what they are good at. For example China specialises in computer production, while US has companies at Seattle Boeing specialising in aircraft production.
The reasons for specialisation include the fact that some countries are adept at producing some goods while others are adept at other goods.
Secondly the geographical location of country determines the goods it can produce as this dictates the climate .For instance Germany would spend so much resources producing bananas at the climate in Germany does not really support banana growth.
In Kenya the tropical climate favours growth of tea which is Kenya leading export. The favourable climate and the soil has therefore made Kenya specialize in the production of tea for export to Europe and other parts of the world.
The third consideration is the economies of scale. A country would only engage in production of goods where it enjoys economies of scale. Agglomeration and other positive feedbacks. (For instance for a country to produce aircrafts it needs to subject the same to extra ordinary economies of scale)
The comparative Advantage Theory, developed by Ricardo is a major running theory behind specialisation. According to this theory a Country when Country A for instance can produce mangos and oranges but the costs of producing mangos per unit is lower than that of producing orange then this Country will specialise in mango production since it has comparative advantage in mango production in relation to production of oranges. This is a driving force in specialisation.
The advantage of specialisation does no come from any differences between the factor endowments but from that fact that each country producing a lot of one thing may be more efficient than them producing lesser amounts of many things.
Factor endowment also leads to specialization and there increase international trade between countries. Under the absolute theory advantage that input a country uses in the production of a good should be lesser than what another country uses in the production of the same good.
Kenya’s leadings export is tea and it uses this in the international market. The Climate in Kenya favours tea farming .Further Teas production is labour intensive and labour is cheap in the country hence it makes since for export of tea as it engages in international trade. On the other hand Kenya imports electronics from China and Japan where there are economies of scale and abundance of skills the production of electronics.
Winners and Losers from Trade
Whereas specialization is essential for international trade there are usually winners and losers from trade.
The basis of the above is the fact that nations have different economies.The usual forces of demand and supply do affect the relative price of the good and services. In countries where production is capital intensive the companies will simply increase the capital should the demand increase .This will increase the production hence the capital owners will end up befitting from the trade as opposed to the workers, a situation that leads to inequality. In this situation the winners are the capital owners and the losers are the workers.
On the other hand in the countries where the production is labour intensive as demand increases more labour might be needed. This will lead to a demand for workforce and this in turn leads to high wages for the workers, and high wage bills for the firms leading to yet another inequality .Here the winners are now the workers and the losers are the firms that need the increase in labour force.
In Kenya for example the tea sector could be used to illustrate this. It is a labour intensive are. An increase in demand for Kenyan tea would force the tea firms to increase production by increasing labour.This will lead to high wages for the tea pickers which will push the costs for the firms. The workers will thus be the winners.
When a rich economy with abundant skilled labour trades with a poor unskilled labour abundant country, the skilled and poor unskilled workers in the rich country wills lose out to relative skilled workers in the rich country and unskilled workers in the poor country who will gain. Essentially the unskilled workers in poo countries can gain from trade more that the skilled workers.
An example can be given using my home country Kenya : Assuming a US company that specializes in making pizza production equipment sets up a factory in Kenya, It would come with skilled workforce from the US and would bypass skilled persons in Kenya. At the same time it will employ the unskilled from Kenya for duties such as cleaning as opposed to bringing cleaners from the US. This way that unskilled in Kenya and the skilled from US will benefit more (winners) from this trade arrangement. The unskilled in the US and the skilled in Kenya will lose out.
Another example: For the past few years Chinese Company China Road and Bridge Corporation has been building the Standard Gauge Railway in Kenya. Most of the engineers working on the project were sourced by the company from China since they have superior experience compared to Kenyan engineers. The skilled engineers therefore were losers. At the same time most of the unskilled labour was sourced locally by the Company hence the unskilled workers were winner in this project.These therefore are the asymmetric effects of trade within a country.