International trade is the exchange of goods and services among different countries. This article covers international trade and its features, types, merits, demerits, factors, and institutions.
When domestically produced output exceeds domestic consumption, a country can choose to trade the surplus with another country. The import and export of goods and services worldwide are known as international trade, and they can also be called foreign trade or global trade. Over the past few decades, international trade has grown, becoming an important aspect of nations' economies.
With globalisation, technological advancement, industrialisation, and outsourcing of services, international trade is bagging an important spot in countries' economic and monetary decisions worldwide at an increasing rate. International trade has a huge scope of acquiring huge revenue, building allies with other countries, accumulating technology and capital and boosting the overall economy. When analysing the power and wealth of a country, the bulk of international trade performed is an important judgement factor.
Key terms to understand international trade:
Imports: Imports are those goods and services purchased from other countries/ global markets.
Exports: Exports are those goods and services sold to other countries/ global markets.
Did you know?
According to a poll conducted in the USA in 2020, most Americans favoured international trade. The majority of the participants of this experiment saw foreign trade as a cause for opportunities leading to economic growth.
Need for International Trade
- Lack of availability and requirement of certain goods and services domestically. A country can choose to export their commodities produced in surplus; in exchange for goods and services that are not available/produced in their country.
- For example, a tropical country, country A, can trade rice and other tropical crops with country B, a temperate country, for exotic fruits and flowers.
The Basis for International Trade
- Specialisation in the production of particular goods and services as some countries have natural resources and capital to cheaply and efficiently produce certain goods or services. These countries can produce in surplus and trade with the countries in need.
- This feature is known as 'comparative advantage.'
- For example - Country A has a specialisation in the production of cotton and cloth. Hence it can trade with countries in need of cotton and cloth.
Hence global trade is when multiple countries come together to trade different goods and services, forming a global network, accompanied by financial transactions and thus influencing the economic conditions of nations altogether.
Features of International Trade
- It is the exchange of goods and services between different countries.
- Differences in factor endowments, resources, wants, technological advancements, labour and entrepreneurial skills lead to international trade.
- Global trade gives countries and their consumers' exposure to a wide variety of goods and services.
- The economic policies and decisions taken in the process of foreign trade are known to influence politics, policies, government intervention, and the living standard of the people of a nation.
- International trade is a huge contributing factor to income and expenditure.
- Adam Smith and David Ricardo recognised the importance of international trade.
Factors Affecting International Trade
- Impact of inflation - When there is inflation prevalent in the domestic economy (rising costs of goods and services), it is expected that the people will choose to consume and purchase foreign goods leading to an increase in imports and a decrease in exports.
- Impact of national income - An increase in national income implies increased per capita income. This further implies growth in consumers' living standards and demand, further reflected in demand for overseas goods and services.
- Impact of government restrictions - The government holds a responsibility to impose restrictions on trade for various reasons like - health, safety, protection of domestic producers etc. These restrictions influence the bulk of international trade taking place.
- Impact of the exchange rate - An exchange rate is the price of a nation's currency in another nation's currency. Changes in exchange rates influence the price of imported goods, interest rates and inflation. An increase in the exchange rate leads to depreciation, making exports cheaper and imports more expensive. A decrease in the exchange rate leads to appreciation, making exports expensive and imports cheaper.
- Lack of restrictions on piracy - Lack of restrictions on piracy and duplication would affect the trade of the original producers of a product.
- Geographical location - Climate, location, and presence of natural resources are important factors influencing a country's ease and efficiency of trading.
- Level of economic development - A highly developed and industrial country has greater ability and scope to participate in international trade than an emerging/developing nation.
- Competitiveness - The more competitive a country, the more likely they are to be efficient and cost-saving, thus capturing the world market with its products and services.
- Globalisation - Modern trends over the past four decades have highlighted an increase in international trade and globalisation going hand in hand. Globalisation has led to the integration and interaction of world economies, governments, and people, highlighted by increased technology, logistics, capital and communication flow and reduced trade barriers by governments.
Types of International Trade
- Export Trade - The export trade of a country covers a country's exports. Exports are the outflows of goods and services produced in a country and sold in the global market to other countries. For example, Russia exports oil to China and European countries.
- Import Trade - The import trade of a country covers a country's imports. Imports are the inflows of goods and services purchased by a country from another country in the global market. For example, the USA imports automobiles from Japan and Germany.
- Entrepot Trade - Entrepot trade is a combination of export and import trade. This form of trade is also known as 're-export'. Through this form of trade, a country imports goods and exports them to other countries after adding some value to them. For example, many south-east Asian countries import electronic parts and export assembled or finished electronics to other countries.
Advantages of International Trade
- International trade facilitates international specialisation and comparative advantage.
- International trade finds and creates markets for surplus domestic output.
- International trade facilitates the import and availability of essential and rare goods and services that cannot be produced in the domestic economy.
- International trade is an important means to earn foreign exchange, an opportunity for developing countries to make developing trade.
- International trade promotes and increases the quality of life and standard of living of the citizens of a country. There is an availability of more choices in goods due to an increase in the size of the markets at competitive rates.
- International trade boosts competition across markets. Producers make sure to produce quality products that are fit to compete in a global market.
- International trade enhances opportunities for investment, stock trading, brokerage, real estate development etc.
- International trade serves as an engine for growth, thus accelerating and boosting the pace of GDP growth.
- International trade facilitates the transfer of technology and capital from developed countries to emerging countries leading to large-scale production.
- International trade creates job opportunities and has decreased unemployment rates with the growing global market size.
- International trade stabilises prices, increases efficiency, develops means of transport and communication, and increases international relations, cooperation and understanding.
Disadvantages of International Trade
- International trade threatens home industries and startups lacking the experience and resources to compete with aged and foreign firms.
- Nations and enterprises involved in foreign trade are vulnerable to unforeseen global events. Unfavourable events can adversely affect demand, supply and employment. For example, the coronavirus pandemic had adversely affected world trade and brought it to a halt.
- A country overly dependent on international trade for imports of strategic resources is prone to be manipulated and controlled by the exporters who can threaten national security and a liberal economy. For example, most of the developing countries of Africa and Asia have been manipulated and colonised by European countries.
- International trade encourages subjugation, slavery and manipulation, hindering economic independence and endangering the freedom and sovereignty of a country.
- International trade poses a great threat to natural resources. Foreign companies can put pressure and drain natural resources at a depleting rate.
- Limited restrictions can lead to the smuggling of harmful goods like drugs, organ trade, human trafficking etc.
- International trade can lead to a shortage of domestically produced goods, leading to inflation in prices in the home country.
- Limitedly restricted international trade can be a harm to the workers. These workers would be more prone to manipulation and overwork with the least benefits.
International Trade Organisations
1. World Bank
The World Bank, headquartered in Washington DC, was founded in 1944. Its purpose is to work for sustainable solutions that reduce poverty and build shared prosperity in developing nations. The World Bank carries out its mission in partnership with five institutions - IBRD (International Bank for Reconstruction and Development), IDA (International Development Organisation), IFC (International Finance Corporation), MIGA (Multilateral Investment Guarantee Agency) and ICSID (International Centre for Settlement of Investment Disputes).
2. International Monetary Fund (IMF)
The IMF, headquartered in Washington, DC, was established along with the World Bank in 1944 at the Bretton Woods conference. It works to establish and achieve sustainable development for all its 190 member countries by supporting economic policies that promote financial and monetary stability, essential for productivity, efficiency, employment creation, and well-being.
3. World Trade Organisation (WTO)
The WTO was founded on 1st January 1995 under the Marrakesh Agreement. It is an international organisation that works for open trade for all, and it provides a forum that negotiates agreements to reduce obstacles to ensure free and fair international trade.
4. Asian Development Bank
The Asian Development Bank was established in 1966 and is headquartered in Manila, Philippines. ADB's vision is a prosperous, inclusive, resilient, sustainable Asia and Pacific region. Its efforts aim to eradicate extreme poverty and assist its members with loans, grants, technical assistance, and equity investments to promote social and economic development.
5. New Development Bank
The NDB was established at the 4th BRICS Summit held in New Delhi in 2012 by Brazil, Russia, India, China, and South Africa leaders. It mobilises resources for infrastructure and sustainable development projects in BRICS and other emerging and developing countries. NDB's key areas of operation are clean energy, transport, infrastructure, irrigation, urban development, and economic cooperation among member countries.
National Institute of Foreign Trade
- The National Institute of Foreign Trade is a respected institution established in 1907. The 'Swadeshi Movement' marked this period.
- NIFT was established to represent Indian business.
- It is recognised by the IMC Chamber of Commerce and Industry. The IMC is a premier organisation of trade and commerce in India that persistently pursues the agenda of opportunities identification, addressing critical issues, and driving the Indian business to sustainable growth.
- NIFT aims to present inputs and knowledge on international trade to those who want to pursue exporting and importing
- NIFT is an institution for aspirants who want to succeed in foreign trade careers.
Let us now summarise the points discussed in this article -
- International trade is the exchange of goods and services across countries. We can also call it foreign trade or global trade. It involves imports and exports.
- The need for international trade arises from scarcity and want of domestically unavailable goods and services.
- International trade is rooted in specialisation in production, also known as 'comparative advantage'.
- Types of international trade include - import trade, export trade and entrepot trade.
- Some factors influencing international trade are - inflation, national income, geographical location, government restrictions, globalisation etc.
- Advantages of international trade include - an increase in economic growth, the standard of living, globalisation, capital and employment growth etc.
- Disadvantages of international trade include - depletion of resources, prone to lose sovereignty over governance and economy, inflation, etc.
- International Trade organisations - World Bank, International Monetary Fund (IMF), World Trade Organisation (WTO), Asian Development Bank, and New Development Bank.