Even if you walk into a mom and pop shop close to your house, you will be inundated with countless choices of food and drinks from all around the world. And keep in mind this is perishable products we are talking about – i.e. agricultural and food industry products that might go bad within days.
And yet, that product is made available for you in your local shop, which might be within walking distance, from thousands of miles away.
This great diversity of products is the direct result of a notion called international or global trade.
In this article, we’ll discuss the fundamentals of global trade, its types, and of course the advantages that it offers everyone around the world.
What Is International Trade?
In simple terms, when countries exchange the products that they manufacture with each other, it is known as international trade. But it is not only limited to physical products.
This type of trade can be extended to any goods and services that are traded between nations.
Global trade plays one of the most important roles in today’s modern economy. The reason is that aside from the economic aspects, global trade opens up the door to many other exchanges between countries.
Two of the pillars upon which global trade has been developed into its current form today have to do with possibility of production and of course costs of production.
There are certain goods that are only possible to produce in certain countries, due to natural constraints. For instance, limitations with regard to natural resources and mines. So, imagine a country that is mostly desert and has a lot of oil reserves can trade them in exchange for other goods that are not possible to produce in their locale.
This is also true for services. There are certain services offered by countries that are not possible to have in other countries. Thus the exchange and trade of services is also an important part of global trade.
The other factor involved in global trade is the cost of production. Given the unique conditions of certain countries, labor costs might be much lower than other countries. For instance, some Asian, especially east Asian countries with much higher populations are able to delegate work to a much less expensive workforce. Thus the low cost of labor will lead to cheaper products.
Therefore, the cheaper final price of certain products will make them more financially sound for other countries to import rather than produce themselves.
What Are Different Types of International Trade?
In the international trade landscape, not all economies pull the same weight. This means that some countries receive more than what they send out to other countries and vice versa.
This is where the idea of different trade types comes into play. There are three main types of trade:
When an economy buys goods or services from another country or from the global market it is called to be an import. Generally speaking, a higher proportion of import compared to export is a sign of a weaker economy. This is what is known as a trade deficit. Ergo, a country imports more than it can export.
On the other hand, selling goods or services to the international market and to other economies is known as exporting. Contrary to the point raised for import, a higher amount of export compared with import is generally regarded to be the sign of a powerful economy. This is why the most powerful economies in the world, especially the US and China, are among the biggest exporters overall in the world.
The third and final type of international trade is called entrepot or transshipment. In the process of transshipment, a country imports certain products from another country. But the imported goods are not distributed in the country, rather they are exported again to a third country. This transshipment includes both importing and exporting, and includes three economies at least. In this case, one economy acts sort of as an intermediary that provides the goods to the third country or makes improvements prior to exporting. For instance, imagine a country that imports necessary raw material to produce electronic chipsets which are then exported at a higher price to another country.
Benefits of International Trade
We touched upon the benefits of global trade earlier, but what are the full extent of benefits that can come with international trade?
As we saw, there are some countries that can produce some products faster and also at a lower cost. This will create a situation in which importing certain products will be more beneficial than producing them. This will also give an incentive to the producing country to allocate more resources to that product which has a high demand in the international market.
Conversely, there are certain countries that are not able to produce some products as efficiently as it would make financial sense. So it would behoove that economy to import that product rather than producing it.
This is how international trade can greatly benefit all parties involved. Global trade will help both the exporter and importer countries to expand their markets.
Furthermore, consumers will have access to products that otherwise might not be available domestically.
All the processes between various economies as a result of international trade makes the market more competitive. This will in turn lead to competitive pricing and cheaper products.
The Importance of Comparative Advantage
A vital concept in global trade is known as the comparative advantage.
The idea behind comparative advantage is that countries will have come to recognize that they are more efficient in the production of certain products rather than others.
This way, they will refrain from producing goods that will have a higher final price for them. So each country will specialize in producing what is most efficient for them. And then they will trade various products with one another.
Comparative advantage will provide a much higher degree of efficiency. As it will make economies more specialized in their manufacturing.
But there is an opposition to comparative advantage that is known as protectionism in economics.
Can Protectionism Help Economies?
The other side of comparative advantage is protectionism.
Protectionism is the idea in economics that seeks to protect the domestic economy and shield it from globalization and international trade.
The basic notion of protectionism is to limit imports.
This is done so through various measures, the most basic of which is import tariffs. Import tariffs will clearly and obviously limit the ability of an economy to import.
The proponents of protectionism claim that their position is to protect and develop the domestic industry by limiting imports. This means certain products might have a higher finished product price. But it will help create more job opportunities.
Global trade plays a crucial role in the economic mechanism that is paramount in today’s world.
For a variety of reasons, some countries are simply better and more efficient at producing certain products than other countries. These are countries that would be able to export their products and those other countries that are less efficient at producing those specific products would be able to import them rather than producing them.
This is where the notion of comparative advantage comes in. Each economy is good at producing something. So in this situation, every country specializes in what they are best at and then trade their products with each other, leading to everyone benefiting from this exchange.
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Q: What is international trade?
A: International trade refers to the exchange of goods and services across national borders.
Q: Why is international trade important?
A: International trade can provide numerous benefits, including increased economic growth, improved efficiency, greater choice and competition for consumers, and access to new markets and resources.