International Trade refers to the trading or exchange of goods and or services across international borders. International trade consists of goods and services moving in two directions.
International trade allows countries to expand their markets. In this way, residents of that country gain access to products that are not available domestically. These products, which can be defined as goods and services, consist of main topics such as natural resources, mines, energy resources, agricultural products, ready-made food, electronic devices, automotive, industrial products, military equipment, textiles, and ready-made clothing.
International trade of goods and services is different from domestic trade. In short, the two trading parties have other trade laws, various tax regulations, and additional customs tariffs.
International trade is the act of selling or purchasing goods or services produced or intermediated by merchants, companies, or institutions operating in a country in a different market beyond national borders or from an overseas market.
WTO statistics, including economic data of the last 50 years, shows international trade helps boost nations’ wealth.
Basic Reasons Of International Trade
Many factors cause a product to be requested from another country and find a buyer in that country. The most important of these is price differences, do not forget that low and high demand products are valuable; supply-demand balance is the most significant factor in the displacement of goods and services.
Factors that require international trade are productivity differences between countries, factor density differences, and the absence and excess of tradable goods. The main reasons for importing a good or service from a different country can be based on rational explanations such as resource scarcity and fashion, attraction created by differences, and political relations.
For example, It is a need for companies in a country with a limited production of ready-to-wear and textile to import ready-to-wear products to ensure supply-demand balance in the domestic market. On the other hand, the imports of ready-made clothing in a country that produces a ready-made garment exporter with a variety of products in its domestic market and has high quality and economical products can be explained by the interest demand of consumers for different brands.
On the other hand, sometimes countries may encourage mutual trade by lowering customs duties as a requirement for developing political relations. The tax advantage may lead to the importation of products that are sufficiently available in the domestic market.
International Trade and Trading Blocks (Trade Alliance)
International trade was key to the rise of the global economy. Today, countries are forming regional blocs by beginning trade communities and concluding bilateral agreements. The main reason for this is primarily to develop trade with neighboring countries. Another fundamental reason is to focus on products where they can earn higher income with lower investment costs by specializing in the product groups they are advantageous to.
This plan requires importing non-manufactured products, but the export of specialized products generally improves the export-import balance in favor of the country. The European Union is a regional trade union that emerged with this philosophy.
Trade blocks refer to the associations between member countries that establish preferential trade arrangements. There are four types of trading bloc: preferential trade area, free trade area, customs union, and common market. The world’s most enormous trading blocks are: EU, ASEAN, APEC, USCMA, BRICS, COMESA, MERCOSUR,
Export & Import Definition and Examples
International trade is simply about the goods and services trading between the countries: The goods and services could flowing into a country as export and flowing out of a country as an import. The terms export and import show how much a country sells and purchases abroad.
To explain export and import, we will give two examples that will shed light on how international trade works.
- Company “A” operating in UK has stores selling ready-to-wear products. Company “B” is the Turkish Suit producer.
- At the “Premiere Vision” fair held in Paris, Sales manager of company “A” visited the company “B”’s booth and examined the “Suit” products of the Turkish company.
- The negotiations take place in Turkey, finally both company agreed that “B” company will produce 5,000 suit and 1,000 jacket in 1 month and arrange the delivery to UK
- Company “B” completes the production after 3 weeks and also arranged the shipment. Company “A” pays the amount of the invoice.
- Company “B” loads the products in a container and deliver it to UK according their agreement.
In this operation, “A” company in UK is an importer. “B” which is located in Turkey is the exporter company. The trade that takes place between them called is an international trade.
What Is WTO?
The World Trade Organization formation is based on the General Agreement on Customs Tariffs and Trade, which was established on 01.01.1948. The purpose of GATT’s establishment was to enable countries to remove unilateral trade barriers, reduce import taxes, and develop common trade laws that all nations would accept.
GATT was transformed into the World Trade Organization on 1.1.1995.
The primary purpose of the WTO is to encourage liberalism in foreign trade and to end practices that make trade difficult between countries. With 164 members, WTO is an international organization aiming at the liberalization and orderly functioning of international trade.
WTO WORKING AREAS
- To create a free trade system where member states can trade under fair and full competition conditions.
- Developing trade and economic relations between member countries
- To prepare projects to realize full employment in all countries.
- To ensure a stable increase in real income,
- To increase the production and trade of goods and services,
- To ensure the most appropriate use of world resources by the sustainable development goal.
- To produce policies for the establishment of trade balances to respond to the needs and concerns of countries at different economic levels.
Trade wars are unilateral actions by more than one country to eliminate or restrict bilateral trade. One country can exchange with another country difficult by increasing import taxes, setting quotas, and prohibiting the import of specific product groups for various reasons. The trade war begins when the other country retaliates with a series of similar practices.
The most recent and important example of trade wars is happened in 2018. In 2018, the US launched a series of trade wars, first with China by imposing import duties on several product lines, then with the EU, Canada, and Mexico, by imposing taxes on steel products.
Advantages of International Trade
- Efficient use of Natural Resources: The sale of natural resources such as timber and marble only to the domestic market will keep the industry and product prices stable. However, suppose it starts to receive demand from abroad. In that case, companies that can produce at higher capacities and sell existing products at better prices will be able to use resources more efficiently.
- Availability of all types of Goods: It enables the consumers in the country to possess different kinds of goods and services, including those which they are not able to produce or can’t be raised in that country
- Specializations: International trade leads to the specialization of different types of goods and services in other countries.
- Large Scale Production: Taking orders from other countries increases the existing customer base and production capacity. It enables to produce in large scale quantities.
- Price Stability: It helps in equalizing the prices of the goods and services, removing the prices’ unexpected fluctuation.
- International Cooperation: Trade has a unifying function. Countries with trade relations tend to resolve potential problems by compromise and continue trade. While countries with trade between them buy products and services from each other, cultural convergence takes place.
Advantages of International Trade: Concepts
a) Comparative Advantage: Trade encourages a country to specialize in manufacturing only those goods and services that these goods or services can deliver more effectively with more profitable, after taking into account “opportunity cost.”
b) Economies of Scale: Taking higher orders for a product will increase the amount of product to be produced. The rule of thumb in trade is that the effect of fixed costs on unit cost will decrease as the number of production increases, so the more you produce, the more your unit profit.
Producing in higher volumes provides more significant economies of scale.
c) Competition: International trade boosts competition. Manufacturers try to give the best price offers while maintaining the advantage of quality and price. When suppliers sell raw materials and services, they focus on higher-quality or cheaper offers than their competitors. As a result, consumers have more choices, and they will be able to buy products and services less expensive than a monopoly market.
d) Transfer of Technology & know-how: International trade accelerates technology transfer between countries. In the last 40 years, it has been observed that the difference in technology and know-how between industrialized and developing countries has decreased in parallel with the increase in a free-market economy and mutual trade.
e) Jobs Opportunity: The increase in the country’s export figures indicates that the products produced in that country are increasing. In countries that increase production capacity, there will inevitably be an increase in production factors and naturally in the number of labor. Countries such as Japan, Germany, and South Korea have lower unemployment rates than countries that apply protective trade policies.
Dis-Advantages of International Trade
- Adverse effect on Home Consumption: Closure of domestic companies that cannot compete with imported products can lead to unemployment and employee unemployment in these companies.
- Economic Dependence: Exporting to a single country can put the country’s economy into a crisis if the country’s demand is cut. Likewise, a cut in a strategic product imported from a single country is dangerous.
- Political Dependence: Dependence on a single country for import or export can also cause that country to press the other country with political demands.
- Wars & Conflicts: International Trade may also result in trade rivalries
- Problems that may occur in mutual trade can cause a conflict. Trade cuts due to war could cause an economic crisis.
Disadvantages of International Trade: Concepts
a) Over-Specialization: Countries that specialize in a certain number of products and services are more severely affected by product-based global crises. For example, a country that specializes in the automotive industry and whose exports depend mostly on automotive income, will be seriously affected by a crisis in the automotive industry.
b) Competitive Disadvantage: Foreign trade is twofold, export and import. In a country that adopts liberal policies in foreign trade, newly established companies, companies with limited capital power or technology may not be able to compete with foreign companies, especially multinational companies. As a result, domestic capital may be deleted from the market.
c) National Security: if a country is totally dependent on imports for strategic industries. It may be under pressure due to economic or political problems with companies or countries where these companies operate. Import of these products may face quotas or sanctions.
Tariffs and Non-Trade Barriers in International Trade
Tariffs are a tax on the value or amount of imports. Also called customs duties. While the reason for the birth of tariffs is to provide income to the state, it is used today to protect domestic companies from international competition or import a product difficult. For example, the beginning of the trade wars was the USA’s announcement that China, EU countries, and Nafta members would charge an extra 25% tax on steel imports. The purpose of the 25% tax increase was to eliminate the competitive advantage of exporting countries and increase domestic producers’ market share.
Restrictions placed on the quantity or value of goods imported or exported in a given period are called quotas. Quotas can be applied as quantity limitations or value restrictions. Quotas can only be used against a single country or all countries. For example, the European Union imposes different quotas for different countries on imports of agricultural products. Country A has a quota to export 10,000 tons of olive oil annually to EU countries with customs duty exemption, while country B will pay customs duty after 50,000 tons.
c) Non-Tariff Barriers
Apart from tariffs and quotas, there are some other methods to restrict imports. These methods that are not based on rational reasons or have no standard content are called non-tariff barriers. For example, a request to change the label and packaging standards of an “X” product imported from a country. Like the request for additional certificates and permits that were not previously requested for these products. These demands aim to increase the costs of that product or make import more difficult by extending the import process.
d) Trade Embargo
The export embargo is a ban on the exports of goods, capital, and technology. Political reasons often cause embargoes. For example, the 1990 embargo imposed after Iraq’s invasion of Kuwait is such an embargo. The embargoed country may prohibit any trade with the embargoed country and pressure other countries with political or economic allies to support this embargo.
Brief History Of International Trade
In ancient times, the Mediterranean basin had an intense trade, especially between the city-states established on the Mediterranean and the Black Sea coasts. Egypt, Phoenician, Hittite, Assyrian, Persian states, and Greek colonies in the Aegean basin were strengthened by mutual trade. The Silk Road was a trade route connecting China to Asia Minor, the Middle East, and ultimately Europe.
In the 16th century, Mercantilism in Europe claimed that trade was the most proper way to enrich countries. In the 18th century, we see that mercantilism lost its influence, and the industrial revolution and liberalism began to determine the countries’ political and economic policies.
Before the industrial revolution, the country’s economies’ main issue was how to increase the production capacity. Processes such as industrialization, mass production, fabrication production, and the ability to produce many products in a short time created the need to find new markets for industrialized countries. On the other hand, countries with more natural resources than domestic demand, such as mines, precious stones, and energy resources, also required international trade. Creating a global market and solving the fundamental issues of consuming surplus has provided international trade development.
In the late 19th and early 20th centuries, protectorate and statism were effective in economic policies, and customs tariffs and high customs taxes were applied between countries, making imports difficult.
The foundations of the IMF were laid in the conference, which was held in 1944 with the participation of 44 countries. After The second world war, The Bretton Woods regime exhibited the best overall macro performance of any authority.
In 1995, during the Uruguay round of GATT negotiations, the World Trade Organization (WTO) was created.
In the eighties, the concepts of liberalism and free trade ensured the integration of developing countries into the WTO and the development of international trade, with credit programs implemented with the IMF and World Bank support. In the 2000s, all major economies of the world, including China, integrated into global trade.