Question

What does it mean for international trade to be frictionless?

Why is it beneficial for international trade to be frictionless?

What are some ways countries can impede trade?

Answer 1

International trade is frictionless when there is smooth transaction of goods and services. For example when a firm in US exports parts to Mexico and the goods are delivered through free movement of services and a labourer ensuring that there is free movement of labor, free movement of capital where the payment is received seamlessly and without any restrictions or exchange controls.

It is beneficial for international trade to be frictionless because it increases the comparative advantages of firms and countries all over the world. It reduces the cost of production and transportation and enhances efficiency of capital allocation where there is more money spent on goods rather than other services which increase costs and ensure safety and transportation.

Countries can impede trade via tariffs, custom declarations where goods remain stuck at borders because of stringent clearance measures. Complicated point of origin certificates and extra VAT. Random checks in transit causing delay in delivery of goods and makes it strenuous and troublesome for trade. Where there are exchange controls and restrictions on money received from abroad. Creating quotas where only a certain portion of goods could be imported or exported.