What is trade? Definition and meaning

Trade as a noun can refer to the action of buying-selling or exchanging goods and services between people, companies, countries and other entities. The term is often synonymous with ‘commerce’. It may also refer to a particular industry as in the building, tourist or fur trades.

The term can mean a job or skill, especially one that involves working with one’s hands. Examples include carpentry, plumbing and mechanics. Traditionally, tradesmen were people with these skills. Rich homes, hotels and business premises used to have a ‘tradesman’s entrance’.

People who work in trades are those employed in a particular industry or business, as in “That warehouse only sells its goods to the building trade, never directly to the public.”

As a verb, ‘to trade’ means to purchase and sell goods and services, either at individual, commercial or nation-to-nation levels. We have been trading since prehistoric times – hundreds of thousands of years ago. We used to barter goods and services from each other before currencies existed.

When talking about shares in a stock exchanges, the verb is commonly used, as in “a high volume of stocks were traded today in the New York Stock Exchange.’

As a verb, the term may also refer to exchanging or bartering items, as in “When I was at school I used to trade my cheese sandwiches for chocolates.”

When people are talking they can trade stories, i.e. relate stories, or trade insults, i.e. insult each other verbally.

As an adjective it can mean ‘for those specialized in a particular business or industry.’ For example, the (fictitious) publication ‘International Waiters Today’ is a trade journal – it is just for waiters and waitresses.

Phoenician tradersPhoenicians trading for tin in Cornwall, England. Phoenicia was an enterprising sea-based civilization – from 1500 BC to 300 BC – that traded across the Mediterranean and all the way up to northern Europe. (Image: phoenicians.info/trade)

The Financial Times Lexicon says the following regarding the term ‘trade’:

“1. The activity of buying, selling, or exchanging goods within a country or between countries. 2. The value of a country’s imports and exports, especially when these are compared. 3. The level of activity in a company, industry etc. 4. A particular job, especially one needing special skills with your hands. 4. Buying and selling shares, bonds, etc. on a stock exchange, or an occasion when people do this.”

Why does trade exist?

The exchange of goods and services emerged when humans started specializing – when the division of labor came onto the scene, the buying and selling of goods and services between people grew rapidly.

Trade exists between geographical regions because of the comparative advantage in the production of tradable commodities. For example, bananas that are produced in the tropics are sold to people who live in colder regions of the world. In those colder regions, other products are produced more efficiently and at better prices – such as cars and computers – and are sold to people who live in the tropics.

Trade has become a common method of allowing the citizens of most countries across the world to get the products and services they need. Argentina, for example, sells wheat to Japan and imports computers, cars and other goods from Japanese companies.

Trade may also exist between nations because their governments and people believe in a free market – healthy competition. So, even though both nations may produce similar goods and services, they still allow the free international movement of goods and services – they encourage international trade.

Eduardo Galeano trade quoteEduardo Hughes Galeano (1940-2015), a Uruguayan novelist, considered a ‘literary giant of the Latin American left’, once said: “Almost all wars, perhaps all, are trade wars connected with some material interest. They are always disguised as sacred wars, made in the name of God, or civilization or progress. But all of them, or almost all of the wars, have been trade wars.” (Image: Wikipedia)

International trade consists of the buying and selling of goods and services between nations – imports and exports. When a country imports more than it exports it is said to have a deficit. When exports are greater than imports it has a surplus.

Countries engage in trade so that they can sell the surplus of things they produce and gain access to things they either don’t have or cannot produce enough of. This allows for a balance of a wide range of products and services rather than a surplus of just a few limited items.

Definition of free trade?

Free trade is a policy that some international markets and governments follow in which there are no restrictions on imports from, or exports to, other countries or economic blocs.

The North American Free Trade Agreement (NAFTA) and the European Economic Area (EEA) are examples of regions where free trade between countries exists. NAFTA comprises the USA, Canada and Mexico, while the EEA includes all the European Member states plus Norway, Iceland and Liechtenstein.

Nearly all the countries in the world – except for North Korea, Monaco, South Sudan, Somalia and some others – are members of the World Trade Organization (WTO), which has several multilateral trade agreements.

Thomas Jefferson quote using word 'trade'Thomas Jefferson (1743-1826) an American Founding Father, the main author of the Declaration of Independence, and 3rd President of the United States, once said: “If the present Congress errs in too much talking, how can it be otherwise in a body to which the people send one hundred and fifty lawyers, whose trade it is to question everything, yield nothing, and talk by the hour?” (Image: whitehouse.gov/1600/presidents)

Trade restrictions

However, the majority of governments still impose tariffs and quotas to imports, and apply subsidies to exports, aimed at supporting local businesses and jobs. Some governments restrict the exports of certain natural resources.

While restricting trade to protect local companies and jobs may seem a wise move, in the majority of cases the results are not good for that nation’s economy. Protectionism has invariably resulted in a decline in the creation of wealth, greater long-term unemployment, poorer quality, higher taxes and consumer dissatisfaction.

Venezuela has the world’s largest oil reserves – it should be among the richest countries on the planet. Since the turn of the century, its former leader Hugo Chávez (1954-2013) and current president Nicolás Maduro have pursued a policy of protectionism and nationalization which have left the country today in a tragic economic mess. Basic foods and household items are rarely available in the shops, power cuts are an everyday occurrence, unemployment is rising rapidly, and social unrest is becoming a serious problem.

The richest countries in the world are also the greatest international traders, while the most protectionist are among the poorest. North Korea, Venezuela, Zimbabwe and Somalia have incomes per capita (per head of the population) vastly inferior to those of the USA, Canada, Australia, Japan, South Korea and the nations of Western Europe – all of them established trading nations.

William WilberforceWilliam Wilberforce (1759-1833), a British politician, philanthropist and leader of the movement to abolish the slave trade, once said: “What should we suppose must naturally be the consequence of our carrying on a slave trade with Africa? With a country, vast in its extent, not utterly barbarous, but civilized in a very small degree? Does any one suppose a slave trade would help their civilization?” (Image: biographyonline.net)

What is fair trade

The ‘fair trade’ or ‘trade justice’ movement promotes the use of reasonable labor, environmental and social standards for the production of goods and commodities. The movement focuses on goods that are exported from poorer markets to the advanced economies (rich nations).

The aim is to eradicate the exploitation of poor people so that consumers in the advanced economies can get the best prices for their products. Some people believe that trade itself should be codified as a human right.

Compliance to fair trade standards is either voluntarily adopted by certain importers or enforced through legislation by governments.

Virtually all governments prohibit the importation of goods made using slave labor. In the 1980s, minimum price support schemes emerged, starting off in the coffee industry.

The Fairtrade Foundation makes the following comment on its website:

“With Fairtrade you have the power to change the world every day. With simple shopping choices you can get farmers a better deal. And that means they can make their own decisions, control their futures and lead the dignified life everyone deserves.”

Visible trade refers to importing/exporting goods, physical or tangible things, things we can see and touch. Invisible trade refers to trading in services. Services are things, such as consultancy, that we cannot handle our touch.

An autarky is country that does not trade – it does not import or export goods and services.