International Trade
Refers to the exchange or trade of goods and services between two nations.
What is International Trade?
International Trade (IT) is the exchange or trade of goods and services between two nations.
It contributes to increasing the overall global economy and income. The most widely traded products are clothing, machinery and infrastructure, capital goods, food products, and raw materials.
It has rapidly increased to services including foreign transportation, travel and tourism, banking and investments, warehousing storage and facilities, communication of messages, advertising services, and distribution of goods and services.
The other equally essential developments are the increase in foreign investments and the production of foreign goods and services in a country.
Foreign investments and production usually help companies come closer to their international customers and therefore serve them with goods and services at a very low rate.
IT and production are two aspects of international business that have exponential growth. Foreign trade is exchanging capital, goods, and services across international borders.
It demonstrates a large share of most countries' gross domestic product (GDP).
Various factors contribute to the concept of trading internationally. They are explained below.
Importance Of International Trade
As economic life has become more diversified and complex, no country is self-sufficient and equipped with all resources living in isolation. Countries with various economic, political, and social structures vary regarding their trade relations.
International trade aims to rapidly maximize production and increase the standard of living of the average individual. In addition, it helps nationals of a country consume and enjoy the production of goods in another country.
It is based on the fundamental allocation of resources among various countries. The allocation of these resources using IT under the concept of free trade is present in the global world market.
The most high-quality products are produced and sold in a directly competitive market, and advantages of production efficiency like better quality and lower price are available to consumers across the globe.
A key principle is purchasing goods and services from a country that sells at the lowest possible price to a country with the highest price.
Due to the advent of eCommerce, individuals possessing money can acquire products and services that are not generally available in their own domestic countries. Thus consumer satisfaction is maximized.
Trading internationally gives rise to global economies. It involves importing and exporting particular goods and services sold overseas after being brought into a country.
Imports and exports are used to calculate the country's balance of payments and current account. When exports exceed imports, a positive effect is produced on the economy, known as a trade surplus.
When the opposite happens, where imports exceed exports, it is known as a deficit, and the balance in the current account is reduced.
International trade allows developed countries with advanced infrastructure to optimize their resources effectively, such as technology, capital, and labor.
It has progressed in recent years as trade restrictions have been reduced, and trade liberalization due to globalization has opened up; thus, developing countries and emerging markets such as China and Brazil have boosted their economies.
Why Does International Trade Occur?
The first reason is a lower demand in the domestic market, especially during economic pressure.
However, expanding globally, there is immediate access to a wide range of customers who might not be affected by the local economic pressure and can spend on goods and services in foreign markets.
As different cultures have unique wants and needs, local production can be tailored to cater to international markets based on their unique cultural preferences.
Increased efficiency is an additional advantage due to the economies of scale that exporting goods can bring.
Another reason is productivity, where resources are optimized productively and efficiently to facilitate trade across borders.
Innovation creates more feedback, leading to more benefits from exporting goods and services.
Exporting usually leads to innovation due to maintaining competitive advantage, which helps new product development meet consumer needs, expectations, and wants.
International trade supports business growth, survival, and exponential continuity. It allows the process of foreign trade to support an economy and organization collectively.
It supplements specialization due to the production of various products in several countries. In addition, division of labor allows for a comparatively low cost and leads to economies of scale.
Specialization is another reason for foreign trade. As a result of uneven natural resource distribution, some nations are more suited to produce goods and services economically than other countries.
Certain countries are more geographically disadvantaged in producing other products.
For example, France, with its orchards, produces higher quality wine than England. However, England has much better whiskey than its oak and maize plantations. Hence, it makes no sense for England to produce wine or for France to produce more whiskey. And this is where international trade comes into the picture.
It helps maximize the natural resources of each demographic. In addition, it improves the standard of living across both countries, with residents having access to high-quality wine and whiskey.
They specialize in producing such goods where they can capitalize and sustain a comparative advantage in the existing form of raw material availability, labor, technical knowledge, and skills and get other products in exchange for domestic goods from other countries.
Differences in Economic Growth rates are present since some countries are either developed, underdeveloped, or developing.
Under-developed and developing countries depend upon developed nations for financial help, encouraging foreign trade.
Advantages Of International Trade
The first advantage of trading internationally is optimizing resources in the best way possible for a country. Each country produces goods and services where it is best suitable. The process is efficient and minimizes resource waste to prevent scarcity.
As countries can use their resources to the best possible use, the overall quality of living increases across all the countries.
Foreign trade also results in specialization and encourages the production of different goods and services in various countries. On the other hand, division of labor allows for cost-cutting and economies of scale, leading to higher efficiency and economic productivity as indicated by a country's GDP.
Disadvantages Of International Trade
International Trade has an opposing effect on domestic industry development. It threatens the survival of domestic industries and as a result of foreign competition and unrestricted imports, the growing and future industries in the country collapse.
Excessive exports use up a country's natural resources in a shorter period which causes an economic downturn in the country in the long run and reduces its economic growth, resulting in inflationary pressure on the domestic economy.
Limited product storage is another disadvantage as vital commodities required in a country and short supply are exported to earn foreign exchange. As a result, a shortage of these goods is made domestically and causes inflation.
International supply chains continue to be disrupted by the pandemic; however, a transition towards environmental sustainability stimulates global demand.
The demand for commodities to support environmental sustainability also increases global trade patterns.
International Trade Policies
Trade protectionism is a policy structure designed to protect domestic industry trade against foreign competition.
It is effective in the short term to increase productivity and production practices; however, it reduces the country's competitiveness in the long term.
Two important trade protection tools governments use in foreign trade schemes are tariffs and quotas.
The objective is to stimulate exports and reduce imports to gain a competitive advantage and promote the economic growth of a country in contrast to other economies.
A tariff is a tax-based levy on commodities that exceed customs area boundaries and can be either revenue-producing or protective. Protective tariffs minimize foreign competition as the price of imported goods increases.
On the other hand, revenue-producing tariffs increase revenue instead of restricting imports. Tariffs are key instruments in protectionism and a useful tool in safeguarding domestic industries against foreign competition.
The government imposes a quota to restrict trade by limiting the number of products in a country that can be imported or exported in a specific period.
They regulate trade volume between countries and may be imposed to minimize imports and increase production domestically.
Quotas aim to enhance and stimulate domestic production in the industry and mitigate foreign competition from other countries. Protectionism policies are implemented by the government if there are issues over the quality or safety of products imported from other countries.
Both tariffs and quotas are important policy instruments used in policymaking to stabilize procedures and facilitate the interconnectivity of economies.
International Trade and COVID-19
Not only is COVID-19 a health crisis, but it is also a widespread economic crisis. Therefore, 2020 was a crucial year for the alterations in International Trade.
Key industries such as the airlines, transportation, and consumer goods industries were adversely impacted by the detrimental economic effects of the COVID-19 pandemic.
Supply chains in the global economy were at a halt with shipment delays in the transportation of components and parts of products due for export internationally.
Compared to 2020, there was a positive trend regarding foreign trade in 2021 due to a large improvement in demand stimulation.
Prices of goods and services increased, restrictions related to the pandemic were seized and loosened, and economic recovery occurred. However, world trade faces some challenges in 2022.
Economic growth characterized by macroeconomic trends has been slowed due to persistent inflation in the US and China's real estate and mortgage markets.
Travel connections and transportation at the heart of the global economy have been disrupted on an unforeseen scale, undermining the economic vulnerability of adversely affected sectors, firms, and households.
The unprecedented changes in trade flow across products and destinations imply substantial adjustment costs and increased uncertainty, indicating a need for incentives for businesses, customers, and governments to adopt new strategies for mitigation.
To minimize the adverse impact of COVID-19 on the global trade economy, international cooperation is required to continue progressive trade flow.
Strategies to sustain economic growth amid the global pandemic include:
- Boosting confidence in trade by enhancing transparency in trade policies and developments
- Continuing essential supply chains,
- Preventing unnecessary exports and trade barriers
- repairing for the long term.
COVID-19 is a prime example of an opportunity to prepare for upcoming pandemics in the future.
As the interconnectivity between people decreases due to COVID-19, FDI investments in cash inflows have substantially reduced in developing economies.
It is critical to consider how trade must flow during the pandemic and ensure it can recover globally.
Conclusion
This article shows that international trade is the exchange of products and services between countries. Therefore, it is important for the rise of a global economy and facilitates trade mechanisms between diverse economies.
It increases efficiency, innovation, and productivity, allows a competitive advantage, and optimizes economies of scale.
Although the dynamics of trading internationally have changed due to the introduction of COVID-19, foreign trade is a crucial process that governs global systems, processes, and policies around the world.
With international collaboration and a dedicated commitment by governments, it will continue to prosper amidst the previous economic effects of the pandemic and achieve economic growth.
Researched and authored by Haniya
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