International Trade
Have you ever wondered why the Neanderthals went extinct, despite being individually stronger than us and having bigger brains? What gave homo sapiens a decisive competitive advantage over our distant cousins was international trade, back then called intertribal trade. It turns out that our species has conducted such trade for tens of thousands of years, in contrast to other species of hominids. This is what the archaeologists suggest: while they found that our ancestors imported both materials and finished products as ivory, stones, fossils, seashells and crafted tools were found dispersed through many Homo Sapiens sites. There is no evidence of such trade in case of Neanderthals. Instead, each group manufactured its own tools from local materials. They were self-sufficient. And they died.
Trade, which is the activity of buying and selling, or exchanging goods and services, is a characteristic mark that distinguishes humankind from all other creatures. As Adam Smith, the father of economics, noted:
It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts. (…). Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that is yours; I am willing to give this for that.
International trade is the activity of buying and selling, or exchanging goods and services from one country to another. In other words, imports (goods and services flowing into a country) and exports (goods and services moving flowing out a country). In principle, international trade is not different from domestic trade, as the motivation to involve in a trade does not change whether the trade is across a border or not. However, it might be more complicated and more costly due to the tariffs imposed by governments and other non-tariff trade barriers.
International Trade and Gold
As international trade helps boost nations’ wealth, it is at the heart of today’s global economy, even though protectionism has recently gained in importance. But what is the link between international trade and gold?
First, the gold market is a truly global market, and gold is traded by investors all over the world. So, gold is a very important part of the international trade. Actually, for more than 5,000 years, gold was the single commodity that was universally accepted between individuals, groups, and civilizations, which paved the way for the gold standard.
Second, gold is a safe-haven assets, so it can offer an insurance against the most extreme protectionist measures against the international trade. In particular, gold can offer protection against the trade wars. Perhaps the best example may be, as the chart below shows, August 2019, when gold soared on the news of Sino-American trade war escalation (and declined later when the U.S. eased its stance toward China ).
Chart 1: Gold prices during the renewal of a trade war between the US and China in August 2019
Third, despite all the advantages of international trade, it can mean some negative consequences for the current monetary system. Free movement of goods is closely related to free movement of capital. Capital mobility – in a system of fiat currencies and credit booms – can lead to hot money flows generating financial instability that can even cause a fnancial crisis. In such a case, gold typically shines.