THE CONCEPT OF INTERNATIONAL TRADE

THE CONCEPT OF INTERNATIONAL TRADE

INTRODUCTION

By definition, trade is the process of buying and the selling of goods and services or the exchange of goods and services among people. While international trade is the exchange of goods and services among countries of the world. It can take the form of importation, exportation or entrepot. When it takes the form “importation”, it means that the buyer buys goods from another country into his own country. If it takes the form of “export”, it follows that the person sends the goods away from his country to another country. But if it is “entrepot,” It explains a situation whereby a buyer imports into his country and exports same to another country. It is a cornerstone of the global economy. It has been a driving force behind economic development and the exchange of goods and services across borders. The concept of international trade is deeply rooted in the history of human civilization, with nations and individuals exchanging goods and services since ancient times.  Let us consider the following points to derive home the concept of international trade: benefits, the founder mental principle and challenges of international trade, and also its impact on economies globally and on societies.

HISTORY

Historically, the roots of international trade can be traced back to ancient civilizations, such as the maritime routes of the Roman Empire,

Silk Road connecting West and East, Phoenician trade network. These early trade routes facilitated the exchange of spices, precious metals and knowledge. The desire for exotic goods and the recognition of the comparative advantage of different regions drove trade across continents of the world

However, it wasn't until the Age of Exploration in the 15th and 16th centuries that international trade began to take its modern form. European explorers sought new routes to the Americas as well as Asian countries, leading to the discovery of new lands and the establishment of international trading networks. This era marked the beginning of the globalization of trade and the exchange of goods and services.

THE BENEFITS OF INTERNATIONAL TRADE

 

1.    The followings are some of the major benefits of international trade to the countries that are participating in it.
1. SPECIALIZATION: Those that are participating in international trade can specialize in producing goods and services in which they have a comparative advantage. This specialization enhances productivity, reducing the cost of production and it improves skill, promotes efficiency, encourages quality and finally leads to exchange.

2. JOB CREATION: International trade creates job for those who are involved in it thereby reduces the level of unemployment in the world.

3. GROWTH IN THE COUNTRIES ECONOMY By expansion of markets and increasing the scale of production, it contributes to economic growth. It allows countries to access larger consumer bases and diversify their sources of revenue

4. ENHANCEMENT OF A COMPANY’S REPUTATION: Companies such as Alibaba has been made popular and globalized through international trade. Today, the company “Alibaba” is well known not just among the Chinese but globally.

5. CHOICES:  It provides consumers with a wider variety of products at different price points. This variety improves consumer choice and enables access to goods and services that might not be available in such country.

6. THE INCREAMENT OF REVENUE: Countries can increase their revenue through international trade by imposing import and export duties on imported and exported goods.

7.  GLOBAL COMPETITION: Engaging in international trade make firms to become more competitive in a global context. Competition drives innovation and leads to higher product quantity and quality.

8. ALLOCATION OF RESOURCES: International trade encourages the efficient allocation of resources. Countries can focus on industries that are well-suited to their resources and capabilities, leading to optimal resource utilization.

9. IMPROVES NATIONS RELATIONSHIP: International trade ensures good relationship among nations of the world since they stand the chances of benefiting from one another.

10. FOREIGN DIRECT INVESTMENT (FDI): International trade often goes hand in hand with FDI, where companies invest in foreign markets. FDI can bring capital, technology, and employment opportunities to host nation.

 

THE PRINCIPLES INVOLVE IN INTERNATIONAL TRADE

1.  GAINS FROM THE TRADE: If countries engage in international trade, they can both produce and consume more by specializing in the production of goods where they have a comparative advantage. This leads to increased output and in turn, improve the standards living for all the countries involved

2. THE PRINCIPLE OF COMPRATIVE ADVANTAGE: One of the central principles of international trade is the concept of comparative advantage. This idea, first articulated by economist David Ricardo, suggests that countries should specialize in the production of goods and services in which they have a relative efficiency advantage. This specialization leads to increase in productivity and efficiency, benefiting all the trading countries.

3. TRADE BARRIERS: Accepted that International trade is generally beneficial, it has some barriers that can impede its free flow. These barriers may include tariffs, non-tariff barriers like restrictions and regulations. Reducing these trade barriers has been a key focus of international trade agreements.

4. CURRENCY EXCHANGE: It involves transactions in different currencies. Exchange rates can impact the terms of trade and the competitiveness of a country's exports or import. Exchange rate fluctuations have significant effects on trade balances globally.

5. BALANCE OF TRADE: The trade balance, which represents the difference between a country's exports and imports, is a key metric in international trade. A trade surplus occurs when exports exceed imports, while a trade deficit happens when imports surpass exports within a given period of time.

 

 INTERNATIONAL TRADE CHALLENGES

There some challenges which international trade imposes on those who participate in it. They are:

1. IMBALACE IN TRADE: Continuous trade imbalances, such as large trade deficits, can lead to economic dependency on foreign capital. These imbalances can have adverse effects on the indigenous industries.

2. ENVIRONMENTAL STANDARDS AND LABOUR: Differences in labour and environmental standards between countries can lead to concerns about unfair competition and unsustainable practices, thereby imposing challenge.

3. INCOME INEQULITY: The benefits of international trade are not equally distributed. Some industries and workers may be negatively affected, leading to income inequality. This is a challenge that sends concern to policymakers to address.

4. INTELLECTUAL PROPERTY RIGHT: Protecting intellectual property rights, such copyrights, is crucial in international trade. Violations of these rights can lead to disputes and hinder innovation.
5. CURRENCY EXCHANGE RATE: Exchange rate fluctuations can create uncertainty for business engagement in international trade. Sudden currency depreciation or appreciation can impact import or export competitiveness.

          INTERNATIONAL AGREEMENT

 https://youtu.be/o3BNXCKGBpg

To provide solution to these challenges, nations have entered into certain agreements which ensure the smooth running of international trade. Some of the most prominent trade agreements and organizations include:

1.NORT AMERICAN FREE TRADEN (NAFTA): NAFTA, now succeeded by the United States-Mexico-Canada Agreement (USMCA), created one of the world's largest trade blocs which reduced barriers to trade between Canada, United States of America and Mexico.

2. WORLD TRADE ORGANIZATION (WTO): The WTO is a global organization that sets rules for international trade, promotes free trade and provides a platform for negotiations among member countries.

3. EUROPEAN UNION (EU): EU is a political and economic union of 27 European countries. It has established a single market with common regulations and a common currency, the Euro and this ensures the smoothness of trade.

4. TRANS-PACIFIC PARTNERSHIP: (TPP): The TPP was a trade agreement among Pacific Rim countries, aimed at reducing trade barriers. When the U.S. withdrew, the agreement was renegotiated and renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

THE IMPACT OF INTERNATIONAL TRADE ON THE ECONOMIES

The impact of international trade on individual economies is great. Here are some key ways in which it influences nations economies.

1. DISTRIBUTION OF INCOME: International trade can affect income distribution. Workers in industries with a comparative disadvantage may experience wage stagnation or job loss, while workers in export-oriented (Comparative advantage) industries may benefit.

2. ECONOMIC GROWTH: Nations that engage in international trade tend to experience higher economic growth rates. Access to larger markets and the benefits of specialization contribute to this growth.

3. PRICES: Imports can lead to lower prices for consumers, as they have access to a wider range of products.

4. JOB CREATION AND DISPLACEMENT: International trade can create jobs in export-oriented industries, it can also lead to job displacement in import-competing sectors.

5. INNOVATION AND PRODUTIVITY: Competition from international trade can drive domestic firms to innovate and improve productivity to remain relevant

6. FOREIGN DIRECT INVESTMENT: FDI, linked to international trade, can bring foreign capital and technology to host countries, thereby boosting their economic development.