What is international trade? Definition and meaning
The definition and meaning of International Trade refers to the exchange of products and services from one country to another. International trade consists of goods and services moving in two directions: 1. Imports – flowing into a country from abroad. 2. Exports – flowing out of a country and sold overseas.
Visible trade refers to the buying and selling of goods – solid, tangible things – between countries, while invisible trade refers to services.
While disagreeing on a number of points, one that virtually all economists agree on is international trade and its benefits for nations and the world.
When a person, company or government buys a product or service produced more cheaply in another country, living standards in both nations rise. There are several reasons why things are purchased from foreign suppliers, including price, availability and quality.
According to stats.oecd.org: “The two main data items used in the concept of international trade are imports and exports. Imports of goods measures the value of goods that enter the domestic territory of a country irrespective of their final destination. Exports of goods similarly measures the value of goods which leave the domestic territory of a country.”
The foreign producer – the exporter – also benefits by making greater sales that would be possible if it solely sold to its own market. The exporter may also earn foreign currency, which it can use to purchase goods abroad, thus making it also an importer.
The term ‘commerce’ is often (not always) used when referring to the buying and selling of goods and services internationally.
International trade has winners and losers
Not every single entity gains from international trade. If a producer in Country A can make product X more cheaply than a producer in Country B, the more expensive producer loses out if the cheaper product is imported into Country B.
Even so, in most cases the purchaser gains more than the domestic producer loses, economists say.
With international trade there is greater competition and more competitive pricing in the market. This means that consumers have more choice and more affordable options. The economy of the world – which is driven by supply and demand – also benefits.
In a world where international trade exists between every single country, goods and services are available which might not otherwise have been available to consumers across the planet.
Adam Smith (1723-1790), a Scottish moral philosopher and pioneer of political economy, known by economists today as the ‘father of modern economics’, was a strong believer in international trade. (Image: adamsmith.org)
Why does international trade exist?
Nations trade with one another when, on their own, there are not the resources or capacity to satisfy domestic needs and wants – demand. By developing and exploiting their domestic resources, countries can produce too much, a surplus, and trade this for goods and services they require.
There is evidence that international trade has existed for more than 9,000 years. Long distance trade – before the existence of nation states and national borders – goes back much further to when pack animals and ships first came onto the scene.
Our modern industrialized world would not exist if countries did not import and export – international trade is at the heart of the worldwide economy.
Goods and services may be imported for one or a combination of the following reasons:
– Price: the item may be produced more cheaply by the foreign supplier.
– Quality: may be superior abroad. For example, Scotch whisky from Scotland, in most people’s opinion, is superior to any local alternative. That is why Scotland exports about 37 bottles of Scotch every second.
– Availability: the item might not be produced locally, so the only way consumers can buy it is by importing it. A raw material, such as oil, iron, bauxite, gold, etc. might not exist at home. Japan, for example, has no domestic reserves of oil, but it is the fourth largest consumer of oil in the world – all of it is imported.
– Demand: might be greater than local supply. In order to satisfy the difference, goods have to be shipped in from abroad.
Ban Ki-moon, the 8th Secretary-General of the United Nations (2007-2017), once said: “Although more than 500 million maritime containers move around the world each year, accounting for 90 per cent of international trade, only 2 per cent are inspected. Strengthening customs and immigration systems is essential.” (Image: Wikipedia)
Advantages of international trade
– Comparative Advantage: trade encourages a nation to specialize in producing or supplying only those goods and services which it can deliver more effectively and at the best price, after taking into account opportunity cost.
– Economies of Scale: if you sell your goods all over the world, you will have to produce more than if you only supplied your home market. Producing in higher volumes provides greater economies of scale, i.e. the cost of producing each item is lower.
– Competition: international trade boosts competition, which in turn is good for prices and quality. If suppliers have to compete more, they will work harder to sell at the lowest price and best quality possible. Consumers benefit by having more choice, more money left over, and top-quality goods.
– Transfer of Technology: is boosted by trade. Transfer of technology goes from the originator to a secondary user, often a developing nation.
– Jobs: great trading nations such as Japan, Germany, the UK, the USA, and South Korea have much lower levels of unemployment than protectionist countries.
The US trades with every virtually every country in the world. Since this image was published (2011), Venezuela has become much less involved in international trade. (Image: Wikipedia)
Disadvantages of International Trade
– Over-Specialization: there is a risk that employees might lose their jobs in large numbers if global demand for a product declines.
– New Companies: find it much harder to grow if they have to compete against giant, established foreign firms.
– National Security: if a country is totally dependent on imports for strategic industries, it is at risk of being held to ransom by the exporter(s). Strategic industries include food, energy and military equipment.
Blocking trade harms the economy
Blocking trade in the hope of giving infant domestic companies a chance to grow has been shown in the long-term to hurt the overall economy. When governments adopt a protectionist policy, other nations retaliate and trade wars ensue, unemployment gradually rises, and the creating of wealth declines.
Since the turn of the century, Venezuela – which has the world’s largest oil reserves – has pursued a policy of nationalization and protectionism. Protectionism refers to taking measures to reduce imports. Today its economy is shrinking, there are alarming shortages of basic items, electric power is frequently cut across vast regions, and there is growing social unrest.
In every single case, the world’s greatest trading nations – with high imports and exports per head of the population – are also by far the richest. Germany, the Netherlands, Singapore, Japan and Hong Kong are considerably wealthier than, for example Cuba, North Korea, Zimbabwe and Venezuela.
The UK has had a trade deficit with most of its major partners for many years. (Image: ons.gov.uk)
International trade tariffs
Although international trade exists across the world, imports and exports are regulated by quotas and mandates from each country’s customs authority. The importing nation may impose a tariff – a tax – on certain products.
Some markets have special trade deals which list what goods may be freely traded, and which ones are restricted.
The European Union has 27 member states which can trade freely with each other – there are no tariffs or quotas. On June 23rd, 2016, the British electorate voted in a referendum to leave the European Union (EU). The UK now has two options: pursue a Hard or Soft Brexit (BRitain EXITing the EU).
With a Soft Brexit, the UK would still have unfettered access to the EU’s 500 million consumers, but would have to sign up to the free movement of people. With a Hard Brexit, the country would regain total control of its borders, but would lose free access to the market. With a Hard Brexit, tariffs on goods exported to the EU would be between 10% and 20%.
NAFTA (North American Free Trade Agreement) consists of three countries – the USA, Canada and Mexico – which also trade freely with each other.
A country that does not import or export goods and services is an autarky.
Video – What is international trade?
This Crash Course video goes through the basics of international trade and its definition.