Trade, like every other aspect of the economy, has been deeply affected by the global recession that started to emerge in the wake of the 2008 financial crisis. As this book goes to press, we are projecting a decline in world trade for the first time since 1982.

International trade influences a whole range of activities including jobs, consumption and the fight against poverty. It also affects the environment and relations among countries. In turn, trade is shaped by a host of influences ranging from natural resources to fashion. Trade-related issues can give rise to strong feelings, and trade measures such as banning or limiting imports are often called for to respond to major economic problems. An understanding of the benefits and downsides of trade, and of what trade policy can and cannot achieve, will help us to form our own opinions on debates about international trade.

Some features of the modern economy, including globalisation and financial crises, have existed for thousands of years. And debates about the best way to handle certain issues have been around for centuries. The same is true for international trade, and many of the analyses and concepts developed in the 18th and 19th centuries still form the basis for the work of today’s trade economists and policy makers. Knowledge of the basic history and ideas that shaped international trade and its study is an asset in any discussion about international economic relations.

Every nation in the world participates in international trade to some extent. And practically every product is either traded or relies on components from international suppliers. Trade is not just about physical goods, though. Knowledge and experience can be bought and sold internationally as well. So too can the many services we rely on each day. The world’s richest countries still dominate international trade, but their position is being challenged by emerging economies in what is still referred to as the “developing world”.

Goods and services do not flow completely freely among countries, even among those with excellent relations. Countries put up barriers to trade for a number of reasons. Sometimes it is to protect their own companies from foreign competition. Or it may be to protect consumers from dangerous or undesirable products. Or it may even be unintended, as can happen with complicated customs procedures. Tariff barriers have been reduced considerably over the past few decades but other obstacles remain. Getting rid of unnecessary trade barriers would give a great boost to global economic welfare.

International trade usually hits the headlines only when a major disagreement degenerates into a “trade war”. Most of the time, trade is carried out peacefully under a set of rules overseen by the World Trade Organization. “Multilateralism” is the basis of the WTO system – that is, the more partners there are to an agreement, the better. But getting 150 or more countries to agree is a long process, carried out over a number of years in the various rounds of trade talks.

Jobs are created and lost all the time. When the jobs that are lost reappear again soon afterwards in another country, it can seem that international trade makes unemployment worse or that it makes jobs less secure and lowers wages. There is clear evidence that open economies achieve higher levels of wages and economic growth. But trade is only one of many factors at play. A wide array of policies is needed, from education and health to infrastructure and innovation. Effective labour market policies are needed to ensure that the benefits are shared equitably.

Producing goods, consuming goods and moving goods all have an environmental cost that is rarely included in the price we pay. This is also true for trading goods internationally. But it is by no means always the case that a locally sourced product is more environmentally friendly than one that has travelled a long distance. Trade can also help to reduce the negative consequences of economic growth by making environmentally-preferable products and technologies more easily available.

Sustained growth and development have rarely if ever been achieved in countries that have refused to open up to trade and investment. Trade alone though is not enough. Many other factors contribute to development, including education, infrastructure, governance, and institutions. It is only when progress is made on all these fronts that developing countries will be able to harvest the full benefits that come from integration into the global trade and investment system.

Trade liberalisation affects growth in a number of ways. It gives producers access to bigger markets and allows them to increase the scale of their production. It gives consumers access to a wider range of goods at lower prices. It helps knowledge to circulate and encourages finance to seek new outlets. Trade policy also has an effect on growth by influencing the extent to which opportunities are seized. But trade liberalisation and good policy require a number of other conditions to be met to have the greatest impact, such as good infrastructures and a skilled labour force.

Trade and innovation are closely intertwined and mutually beneficial. Trade allows new technologies to move more freely around the world, benefitting more firms and more people. This process increases the size of the market both for the innovator and for those who acquire and apply the innovation. And that in turn stimulates competition and more innovation. This is true not only of products, but also of the processes used to produce goods and services, firms’ business practices and organisation, as well as marketing and distribution systems.

Trade affects practically everything we buy at some stage, and influences many aspects of our daily lives. Whether this influence is good or bad depends on how you look at things. Trade can be a powerful force for positive developments, but it can also bring problems and uncertainties. It may not be the most important factor determining the prosperity of countries and people, but prosperity has rarely if ever been achieved or sustained without it. Trade must therefore be an important component in any overall economic strategy that aims to generate sustained growth and prosperity.