The volume of world trade is very large—about one-sixth of global economic activity. World trade is concentrated heavily in the states of the industrialized North.
Mercantilism emphasizes the use of economic policy to increase state power relative to other states. It is related to realism.
Liberalism emphasizes international cooperation—especially through worldwide free trade —to increase the total creation of wealth (regardless of its distribution among states). Liberalism is conceptually related to idealism.
Most international exchanges entail some conflicting interests and some mutual interests on the part of the states involved. Deals can be made because both sides benefit, but conflict over specific outcomes necessitates bargaining.
The distribution of benefits from an exchange is determined by the price of the goods exchanged. With many buyers and sellers, prices are generally determined by market equilibrium (supply and demand).
Mercantilists favor trade policies that produce a trade surplus for their own state. Such a positive trade balance generates money that can be used to enhance state power.
Trade creates wealth by allowing states to specialize in producing goods and services for which they have a comparative advantage (and importing other needed goods).
Politics intrudes into international markets in many ways, including the use of economic sanctions as political leverage on a target state. However, sanctions are difficult to enforce unless all major economic actors agree to abide by them.
Russia and the former communist states of Eastern Europe are making a difficult transition from centrally planned to market economies, which seem to be more efficient in generating wealth.
States that have reduced their dependence on others by pursuing self-sufficient autarky have failed to generate new wealth to increase their well-being. Self-reliance, like central planning, has been largely discredited as a viable economic strategy.
Through protectionist policies, many states try to protect certain domestic industries from international competition. Such policies tend to slow down the global creation of wealth but do help the particular industry in question.
Protectionism can be pursued through various means, including import tariffs (the favored method), quotas, subsidies, and other nontariff barriers.
Two trends are at work in global trading patterns today: one toward integration of the industrialized West and the other toward the development of three competing regional economic blocs.
The World Trade Organization (WTO), formerly the GATT, is the most important multilateral global trade agreement. The GATT was institutionalized in 1995 with the creation of the WTO, which expanded the focus on manufactured goods to consider agriculture and services. Intellectual property is another recent focus.
In successive rounds of GATT negotiations over fifty years, states have lowered overall tariff rates, especially on manufactured goods. The Uruguay Round of the GATT, completed in 1994, added hundreds of billions of dollars to the global creation of wealth. The Doha Round began in 2003 but had not concluded an agreement by 2007.
Although the WTO provides a global framework, states continue to operate under thousands of bilateral trade agreements specifying the rules for trade in specific products between specific countries.
Regional free trade areas (with few if any tariffs or nontariff barriers) have been created in Europe, North America, and several other less important instances. NAFTA includes Canada, Mexico, and the United States.
International cartels are occasionally used by leading producers (sometimes in conjunction with leading consumers) to control and stabilize prices for a commodity on world markets. The most visible example in recent decades has been the oil producer cartel, OPEC, whose members control more than half the world's exports of a vital commodity, oil.
Industries often lobby their own governments for protection. Governments in many states develop industrial policies to guide their efforts to strengthen domestic industries in the context of global markets.
Certain products—especially food, intellectual property, services, and military goods—tend to deviate more than others from market principles. Political conflicts among states concerning trade in these products are frequent.
A world market based on free trade is a collective good (available to all members regardless of their individual contribution), inasmuch as states benefit from access to foreign markets whether or not they have opened their own markets to foreign products.
Because there is no world government to enforce rules of trade, such enforcement depends on reciprocity and state power. In particular, states reciprocate each other's cooperation in opening markets, or punish each other's refusal to let in foreign products. Although it leads to trade wars on occasion, reciprocity has achieved substantial cooperation in trade.
The expansion of trade is a central aspect of globalization but hardly the only one; today's accelerating pace of economic activity has grown out of a long history of world economic expansion.
Advocates of centrally planned economies argue that political authorities should set prices and assign quotas for production in order to make economies fairer and more just.
Free trade agreements have led to a backlash from politically active interest groups adversely affected by globalization; these include labor unions, environmental and human rights NGOs, and certain consumers.
States are becoming more and more interdependent, in that the well-being of states depends on each other's cooperation. Some scholars have long argued that rising interdependence makes military violence a less useful form of leverage in bringing about political cooperation.
