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What is international trade? Definition and meaning

International Trade refers to the exchange of products and services from one country to another. In other words, imports and exports. International trade consists of goods and services moving in two directions: 1. Importsflowing into a country from abroad. 2. Exportsflowing out of a country and sold overseas.

Visible trade refers to the buying and selling of goods – solid, tangible things – between countries. Invisible trade, on the other hand, refers to services.

Most economists globally agree that international trade helps boost nations’ wealth.

When a person or company purchases a cheaper product or service from another country, living standards in both nations rise.

There are several reasons why we buy things from foreign suppliers. Perhaps, the imported options are cheaper. Their quality may also be better, as well as their availability.

International Trade
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 exporter also benefits from sales that would not be possible if it solely sold to its own market. The exporter may also earn foreign currency. It can subsequently use that foreign currency to import things.

The term ‘commerce’ is often (not always) used when referring to the buying and selling of goods and services internationally.

International trade – winners and losers

Not every single entity, however, gains from international trade. Let’s suppose there are two countries – Country A and Country B. What happens if it costs more for Country A producers to make something than for Country B producers? Specifically, what happens if the two countries trade?

Producers in Country A will subsequently lose out because consumers will buy the Country B option. They choose that option because it is cheaper.

However, the consumer 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.

Imagine one world in which every single country traded internationally. Now imagine another world where international trade did not exist. In which world would consumers be better off? Also, in which world would the countries be richer.

In the world with international trade, both the consumers and the countries would be better off.

Adam Smith - International Trade
Adam Smith (1723-1790), a Scottish moral philosopher and pioneer of political economy, believed in international trade. Many economists today call Smith the ‘father of modern economics.’ (Image: adamsmith.org)

Why does international trade exist?

Nations trade internationally when there are not the resources or capacity to satisfy domestic needs and wants domestically.

By developing and exploiting their domestic resources, countries can produce a surplus. They may use this surplus to buy goods they need from abroad, i.e., through international trade.

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. In fact, it goes back 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. Put simply; international trade is at the heart of today’s global economy. Global interdependence is a fact of life for every country today.

We import goods and services for several reasons. Below are some reasons:

Price: a foreign company can produce something more cheaply.

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: it might not be possible to produce the item locally. Therefore, 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. However, it is the fourth largest consumer of oil in the world. Japan imports virtually all its oil.

Demand: might be greater than local supply. To satisfy the difference, it is necessary to import.

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 globally, you will have to produce more than if you sold just domestically. Producing in higher volumes provides greater economies of scale. In other words, the cost of producing each item is lower.

Competition: international trade boosts competition. This, 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: increases thanks to international trade. Transfer of technology goes from the originator to a secondary user. In fact, that secondary user is often a developing nation.

Jobs: great trading nations such as Japan, Germany, the UK, the USA, and South Korea have one thing in common. They have much lower levels of unemployment than protectionist countries.

US top 15 trading partners
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: 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 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 domestic infant companies a chance to grow hurts the national economy. Specifically, it harms the country’s economy’s long-term prospects.

When governments adopt a protectionist policy, other nations retaliate. Subsequently, there are tit-for-tat responses and sometimes even trade wars. Eventually, unemployment rises, and the creating of wealth declines.

Since the turn of the century, Venezuela has pursued a policy of nationalization and protectionism. Protectionism refers to taking measures to reduce imports.

Venezuela has the world’s largest oil reserves. However, its economy has been shrinking for years. There are alarming shortages of basic items, and electric power is frequently cut across vast regions. In fact, there are now signs of serious social unrest.

In every single case, the world’s greatest trading nations 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.

UK International Trade
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. Tariffs on goods exported to the EU would be between 10% and 20% with a Hard Brexit.

NAFTA (North American Free Trade Agreement) consists of three countries – the USA, Canada and Mexico – which also trade freely with each other.

The Global System of Trade Preferences (GSTP) is a preferential trade agreement between emerging economies and LDCs. LDC stands for Less Developed Country. In most cases, the agreements involve either lifting or reducing tariffs. However, the LDC member nations do not have to reciprocate.

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.