What Is International trade?

By Reem Heakal

If you walk into a supermarket and are able to buy South American bananas, Brazilian coffee
and a bottle of South African wine, you are experiencing the effects of international trade.

International trade allows us to expand our markets for both goods and services that
otherwise may not have been available to us. It is the reason why you can pick between a
Japanese, German or American car. As a result of international trade, the market contains
greater competition and therefore more competitive prices, which brings a cheaper product
home to the consumer.

What Is International Trade?

International trade is the exchange of goods and services between countries. This type of
trade gives rise to a world economy, in which prices, or supply and demand, affect and are
affected by global events. Political change in Asia, for example, could result in an increase
in the cost of labor, thereby increasing the manufacturing costs for an American sneaker
company based in Malaysia, which would then result in an increase in the price that you
have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on
the other hand, would result in you having to pay less for your new shoes.

Trading globally gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries. Almost every kind of product can be found on
the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and
water. Services are also traded: tourism, banking, consulting and transportation. A product
that is sold to the global market is an export, and a product that is bought from the global
market is an import. Imports and exports are accounted for in a country's current account in
the balance of payments.

Increased Efficiency of Trading Globally

Global trade allows wealthy countries to use their resources - whether labor, technology or
capital - more efficiently. Because countries are endowed with different assets and natural
resources (land, labor, capital and technology), some countries may produce the same good
more efficiently and therefore sell it more cheaply than other countries. If a country cannot
efficiently produce an item, it can obtain the item by trading with another country that can.
This is known as specialization in international trade.

Let's take a simple example. Country A and Country B both produce cotton sweaters and
wine. Country A produces 10 sweaters and six bottles of wine a year while Country B
produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units.
Country A, however, takes three hours to produce the 10 sweaters and two hours to produce
the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to
produce 10 sweaters and three hours to produce six bottles of wine (total of four hours).
But these two countries realize that they could produce more by focusing on those products
with which they have a comparative advantage. Country A then begins to produce only wine
and Country B produces only cotton sweaters. Each country can now create a specialized
output of 20 units per year and trade equal proportions of both products. As such, each
country now has access to 20 units of both products.

We can see then that for both countries, the opportunity cost of producing both products is
greater than the cost of specializing. More specifically, for each country, the opportunity cost
of producing 16 units of both sweaters and wine is 20 units of both products (after trading).
Specialization reduces their opportunity cost and therefore maximizes their efficiency in
acquiring the goods they need. With the greater supply, the price of each product would
decrease, thus giving an advantage to the end consumer as well.

Note that, in the example above, Country B could produce both wine and cotton more
efficiently than Country A (less time). This is called an absolute advantage, and Country B
may have it because of a higher level of technology. However, according to the international
trade theory, even if a country has an absolute advantage over another, it can still benefit
from specialization

Other Possible Benefits of Trading Globally

International trade not only results in increased efficiency but also allows countries to
participate in a global economy, encouraging the opportunity of foreign direct investment
(FDI), which is the amount of money that individuals invest into foreign companies and other
assets. In theory, economies can therefore grow more efficiently and can more easily
become competitive economic participants.

For the receiving government, FDI is a means by which foreign currency and expertise can
enter the country. These raise employment levels, and, theoretically, lead to a growth in the
gross domestic product. For the investor, FDI offers company expansion and growth, which
means higher revenues.

Free Trade Vs. Protectionism

As with other theories, there are opposing views. International trade has two contrasting
views regarding the level of control placed on trade: free trade and protectionism. Free trade
is the simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The
main idea is that supply and demand factors, operating on a global scale, will ensure that
production happens efficiently. Therefore, nothing needs to be done to protect or promote
trade and growth, because market forces will do so automatically.

In contrast, protectionism holds that regulation of international trade is important to ensure

that markets function properly. Advocates of this theory believe that market inefficiencies
may hamper the benefits of international trade and they aim to guide the market accordingly.
Protectionism exists in many different forms, but the most common are tariffs, subsidies and
quotas. These strategies attempt to correct any inefficiency in the international market.

The Bottom Line

As it opens up the opportunity for specialization and therefore more efficient use of
resources, international trade has the potential to maximize a country's capacity to produce
and acquire goods. Opponents of global free trade have argued, however, that international
trade still allows for inefficiencies that leave developing nations compromised. What is
certain is that the global economy is in a state of continual change, and, as it develops, so
too must all of its participants.

Following points explain the need and importance of foreign trade to a nation.

1. Division of labour and specialization

Foreign trade leads to division of labour and specialization at the world level. Some countries
have abundant natural resources. They should export raw materials and import finished
goods from countries which are advanced in skilled manpower. This gives benefits to all the
countries and thereby leading to division of labour and specialization.

2. Optimum allocation and utilization of resources

Due to specialization, unproductive lines can be eliminated and wastage of resources
avoided. In other words, resources are channelised for the production of only those goods
which would give highest returns. Thus there is rational allocation and utilization of resources
at the international level due to foreign trade.

3. Equality of prices
Prices can be stabilized by foreign trade. It helps to keep the demand and supply position
stable, which in turn stabilizes the prices, making allowances for transport and other
marketing expenses.

4. Availability of multiple choices

Foreign trade helps in providing a better choice to the consumers. It helps in making
available new varieties to consumers all over the world.

5. Ensures quality and standard goods

Foreign trade is highly competitive. To maintain and increase the demand for goods, the
exporting countries have to keep up the quality of goods. Thus quality and standardized
goods are produced.

6. Raises standard of living of the people

Imports can facilitate standard of living of the people. This is because people can have a
choice of new and better varieties of goods and services. By consuming new and better
varieties of goods, people can improve their standard of living.

7. Generate employment opportunities

Foreign trade helps in generating employment opportunities, by increasing the mobility of
labour and resources. It generates direct employment in import sector and indirect
employment in other sector of the economy. Such as Industry, Service Sector (insurance,
banking, transport, communication), etc.

8. Facilitate economic development

Imports facilitate economic development of a nation. This is because with the import of
capital goods and technology, a country can generate growth in all sectors of the economy,
i.e. agriculture, industry and service sector.
9. Assistance during natural calamities
During natural calamities such as earthquakes, floods, famines, etc., the affected countries
face the problem of shortage of essential goods. Foreign trade enables a country to import
food grains and medicines from other countries to help the affected people.

10. Maintains balance of payment position

Every country has to maintain its balance of payment position. Since, every country has to
import, which results in outflow of foreign exchange, it also deals in export for the inflow of
foreign exchange.

11. Brings reputation and helps earn goodwill

A country which is involved in exports earns goodwill in the international market. For e.g.
Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic
goods.

12. Promotes World Peace

Foreign trade brings countries closer. It facilitates transfer of technology and other
assistance from developed countries to developing countries. It brings different countries
closer due to economic relations arising out of trade agreements. Thus, foreign trade creates
a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such
countries try to maintain friendly relations among themselves.

Gaurav Akrani (2011), What is foreign trade, Types and importance of foreign trade,
Kalyan City Life, recuperaro el 10 de Marzo de 2014 en http://kalyan-
city.blogspot.com/2011/03/what-is-foreign-trade-types-and.html.

1. Explain the main ideas of international trade

2. What is the importance of international trade for a country?
3. Explain: gobalizationa and international trade
4. Advantages of international trade
5. Disadvantages of international trade