Trade has been an activity that has existed in the human race since time immemorial. Since the times of the Stone Age, human beings carried out trade through the exchange of goods and services. Commodity trade was an essential aspect of traditional systems of trade. Before the development of money, people exchanged one commodity for another. Money was revolutionary and changed how trade was carried. If you have walked into stores to buy products before, it is not surprising to find products from every corner of the world. You will find fruits and vegetables from South America, coffee from Brazil or Africa, and wines from international countries, among other products. The above is an example of how trade has developed over the years to the point that commodity exchange can happen between continents. It is known as international trade. It can thus be described as the exchange of goods and services between countries. Items that are commonly traded between countries include consumer goods, raw materials, capital goods, and agricultural products. International transactions are financed by the international transfer of financial payments, through which the banking systems are a significant player.
History of International Trade
As discussed above, barter trade is the oldest form of trade known to humankind. It is a form that continued until the development of Mercantilism, where nations in Europe were more focused on the acquisition of wealth in the way of gold to help implement national trade policy. The mercantilists in the 16th and 17th centuries in European nations took the virtue of gold as an article of faith. IN the 18th century, the international trade mindset was influenced by economists such as David Ricardo and Adam Smith, who is famous for his book ‘The Wealth of a Nation’ 1776. Economists publicized the importance of specialization of production, which dictated the scope of international trade. The 19th century saw the embrace of professionalism. By 1013, countries had done away with quantitative trade restrictions, and customs and duties were reduced in countries trading amongst themselves. All currencies could freely be converted into gold, which was the international monetary currency of that time. In the wake of World War 1, the world economic conditions changed (Henderson et al., 2018). Countries build walls around themselves, trying to safeguard themselves from such adverse effects of war. Trade restrictions and barriers across countries become tight. It is only in recent times that such barriers are being loosened.
Types of International Trade
There are three forms of international trade: Import trade, export trade, and entrepot trade. Import is the buying of foreign goods and services by governments, businesses, and individuals of a country. Imports are goods that come from other countries (exporters) into the country as a form of international trade. Exports, on the other hand, are goods and services that are produced in one country but purchased by another country. Products in exports are produced domestically but sold to individuals, governments, or businesses in foreign countries. Entrepot is the trade-in center for goods from other countries. Businesses and governments take advantage of the same in that they can export their goods to other countries without having to pay import or export duties (Carter & Goemans, 2018). A good example is when goods produced in China are first imported to Japan and then exported to Russia.
Processes of International Trade
The processes of international trade are very complex and thus have to be controlled by various independent bodies. Regulations of the trade ensure the safety of trading partners and also prevent trade exploitation. Organizations such as the World Trade Organization manage international trade processes and ensures that trade agreements and regulations are followed continuously.
Costs Associated with International Trade
Four major components make up the international trade cost sphere and are known as the four T’s of international trade. The first component is transaction costs, which are all costs that are related to an economic exchange between two countries. It includes costs such as those incurred when gathering trade information, enforcing contracts, negotiating terms of trade contracts, and exchange rate costs if at all, the trade is carried out in different currencies. The prices associated with international trade have drastically reduced because of the development of technology. The growth of e-commerce has costs related to international trade as information and communication is more efficient. The second component is the tariff and non-tariff costs. Such costs are levies that governments impose on trade. Hey, could be direct monetary costs that are dependent on the products being traded or standards that dictate the goods that are allowed within certain borders.
Transport costs are those that are associated with the shipping of goods from the place where they are produced to the destination that they will be consumed. Inter-modal transportation costs are also related to international trade. Economies of scale are used by governments and companies to neutralize such costs. Time costs are another component that affects international trade direly. Time costs are related to time lags between when products are ordered and when they reach the destination. International trade involves long-distance trade that usually is affected by time delays (McGovern, 2018). Such delays are brought about by global trade processes such as custom inspection delays.
International Trade Environments
International trade environments are the surrounding in which international businesses and governments carry out their trade. Political environments are in relation to governments and their relationship to business. Political risks in different geographical jurisdictions affect the flow of international trade. Stable political environments encourage international trade, while unstable environments discourage trade. Economic environment refers to factors that contribute to a country’s attractiveness to foreign business activities. Countries are grouped into either developed or developing economies. The more developed economies have a better economy compared to those that are growing and attract more international trade. Another business environment in international trade is the technological environment, which controls the factors that are related to production. The development of new technologies and the adoption of the same affect the level of trade between nations. Firms in the economy do not have control over the environment, and thus their success is determined by how well they adapt to technologies (Bertoletti, Etro & Simonovska, 2018).
The social-cultural environment is critical in international trade. Trade is all about getting goods from producers to consumers. The culture and social life of the consumer affect the products that they consume. Such an environment in international trade is hard to understand as some cultural aspects are essentially unseen. National beliefs and norms affect how a country carries out its trade activities. Understanding such an environment thus increases understanding between nations and their cultures and, therefore, a positive impact on trade.
The Importance of International Trade
International trade makes use of abundant raw materials. Some countries have materials in abundance and thus share the same with other countries through international trade. The trade ensures that states can sell their surplus to other countries and also import goods and raw materials that they lack within the country. International trade also promotes the growth of jobs in domestic and foreign markets. A good is an American economy where over 41 million jobs are supported by activities directly related to international trade. There is a positive correlation between the employment rate and international trade. The trade encourages the growth of business and thus higher employment rates.
International trade fuels innovation, competition, and better methods of production as the trade players compete with each other. International trade leads countries to reach their peak in efficiency and effectiveness, thus developing comparative advantage to other nations involved in international trade. The trade also fuels global growth and development. Nations are able to develop their natural resources and use the same to participate in international trade (Wiedmann & Lenzen, 2018). Participating in the global economy stirs up collaborations and, thus, supportive growth strategies between different countries on the globe. Most countries have a surplus of a particular product which is scarce in another country. The trade thus facilitates the exchange of deficits with surplus between specific countries. Revenues earned through international trade are used to build infrastructure to support such trade, such as ports, railway systems, and roads. It thus becomes beneficial not only to the trade but also to the citizens of the country.
Disadvantages of International Trade
On the other hand, international trade has its limitations. One is the language barrier between various nations. Countries all across the world have different languages that are not easy to learn or understand. Language barriers discourage international business due to the lack of proper communication. Cultural differences also affect people’s perception of a product coming from a culture that is different from theirs. Businesses and other trade partners also face risks that are associated with exchange rates (Wiedmann & Lenzen, 2018). The rates fluctuate, and thus a foreign currency may not be well forecast or stable enough to carry out international trade. Exchange rate risks reduce the competitiveness of businesses. Political instability and cultural differences could also hider international trade. A good example is in countries that are affected by war, such as Iran or Somali, find it hard to recover their international trade to the level the country or business was.
International trade is the exchange of goods and services between one country and another. International trade has its history in the 17th and 18th centuries with the development of economic theories that we still use up to this day. International trades involves player such as trade organizations, businesses, individuals, and governments. International trade costs are divided into four components, and most players in the market have to go through such costs when trading. The form of trade is also impacted by specific business environments such as political, economic, social-cultural, and technological environments. International trade is beneficial to the growth of a country in many ways, such as the creation of employment and infrastructural developments, among others. The trade also has its drawbacks in terms of language barriers, cultural differences, and even risks associated with exchange rate fluctuations.
Bertoletti, P., Etro, F., & Simonovska, I. (2018). International trade with indirect additivity. American Economic Journal: Microeconomics, 10(2), 1-57.
Carter, D. B., & Goemans, H. E. (2018). International trade and coordination: Tracing border effects. World Politics, 70(1), 1-52.
Henderson, J. V., Squires, T., Storeygard, A., & Weil, D. (2018). The global distribution of economic activity: Nature, history, and the role of trade. The Quarterly Journal of Economics, 133(1), 357-406.
McGovern, E. (2018). International trade regulation (Vol. 1). Globefield Press.
Wiedmann, T., & Lenzen, M. (2018). Environmental and social footprints of international trade. Nature Geoscience, 11(5), 314-321.