International (Global) Trade: Definition, Benefits and Criticisms

What is International Trade?

International (Global) Trade is the exchange of goods, services, and capital across international borders. It involves countries importing and exporting products to meet domestic demands, leverage competitive advantages, and enhance economic growth.  Global Trade is the lifeblood of the world economy since it allows different countries to expand their markets and help in the availability of products that may not be available domestically.

Consumer goods, raw materials, food, and machinery are all bought and sold in the international marketplace. Global trade is facilitated by various agreements, regulations, and organizations that govern trade relationships and promote fair practices among nations.

Types of Trade

The three main types of trade are external trade, internal trade and Entrepot Trade.

1. Internal Trade: This type of trade involves the exchange of goods and services within the same country. It encompasses all domestic transactions, including retail, wholesale, and services.
2. External Trade: Also known as international trade, this involves the exchange of goods and services between different countries. It includes imports and exports and plays a vital role in the global economy.
3. Entrepot Trade: Also known as transhipment, entrepot trade occurs when goods are imported into a country and then re-exported without being distributed within the importing country. For example, if metal is imported from India to Singapore, processed, and then re-exported to China, this is classified as entrepot trade. This form of trade is beneficial for various reasons, including access to advanced machinery, the development of technology, and the reinforcement of international relations.

Understanding International Trade

Global trade, also known as international trade, works through a flow of huge complex supply chains between the countries that source raw materials, to the countries that manufacture the raw materials, and later to the consumer nation, which is the nation that puts the final product to use. When a change occurs in one supply chain link, say an increase in the metal price in the production stage, the change affects all the supply chain stages. The exchange products in international trade can either be exports or imports. Import refers to the products that are brought to the local nation. On the other hand, exports refer to products sold to a foreign nation.

Key Takeaways

• Access to Goods and Services: International trade exposes consumers and countries to a wider array of goods and services that may not be available domestically or are more expensive in their own markets.
• Historical Significance: The importance of international trade has been recognized for centuries, notably by political economists like Adam Smith and David Ricardo, who laid the groundwork for modern economic theory.
• Criticism of International Trade: Critics argue that #internationaltrade can disadvantage smaller nations, making it difficult for them to compete on the global stage and potentially undermining local industries.
• Definition: International trade involves the exchange of goods or services between at least two different countries, facilitating cross-border economic activity.
• Comparative Advantage: This economic principle allows countries to specialize in producing goods for which they have a lower opportunity cost, leading to gains from trade and increased consumption of goods.
• Protectionist Policies: Two major protectionist trade policies are tariffs (taxes on imports) and import quotas (limits on the quantity of a product that can be imported), which countries use to protect domestic industries from foreign competition.

Top Traded Commodities by Value (Exports)

Here’s a list of the top traded commodities by export value, along with their respective values in millions of US dollars for the year 2022:

Rank	Commodity	Value in US$ (millions)	Date of Information
1	Mineral fuels, oils, distillation products	$3,988,389	2022
2	Electrical, electronic equipment	$3,493,553	2022
3	Machinery, nuclear reactors, boilers, etc.	$2,573,572	2022
4	Vehicles (excluding railway)	$1,621,658	2022
5	Pharmaceutical products	$875,345	2022
6	Pearls, precious stones, metals, coins, etc.	$866,839	2022
7	Plastics and articles thereof	$815,554	2022
8	Optical, photo, technical, medical, etc. apparatus	$669,128	2022
9	Iron and steel	$564,547	2022
10	Organic chemicals	$537,854	2022

This data highlights the commodities that are most valuable in international trade, reflecting the global demand and supply dynamics.

Benefits of International Trade

The benefits of international trade have significantly driven growth over the last half of the 20th century. Nations with strong international trade networks have prospered and gained considerable influence over the global economy. Additionally, global trade can play a crucial role in reducing poverty.

Key Concepts in International Trade

1. Comparative Advantage: David Ricardo, a classical economist, explained how trade benefits all parties involved—individuals, companies, and countries—when goods are produced with varying relative costs. The net benefits derived from this trade are known as gains from trade, a foundational concept in international trade.
2. Absolute Advantage: Adam Smith, another classical economist, introduced the principle of absolute advantage, which posits that a country can benefit from trade if it can produce goods at a lower absolute cost compared to others. This means that a country can yield a higher volume of output per unit of input.
3. Opportunity Cost: According to the principle of comparative advantage, the benefits of trade hinge on the opportunity cost of production. This is defined as the amount of production of one good that must be sacrificed to increase the production of another good by one unit. Even if a country lacks an absolute advantage in any product, it can still benefit from focusing on the export of goods with the least opportunity cost of production.
4. Reducing Trade Barriers: The benefits of international trade can be amplified through significant reductions in barriers to trade in agriculture and manufactured goods.

The Top 11 Benefits of International Trade

1. More Customers: The first benefit of international trading is that it allows companies to sell their products to more people, which means they can earn more money. For example, if a company sells its product in one country, it may be able to sell it in other countries too. As a result, the company will have more customers and make more money than if it only sold in one country.
2. Economic Growth: International trade contributes to economic expansion by opening up new markets for businesses, leading to increased production, sales, and overall economic activity.
3. Access to Resources: Countries can access raw materials and products that are not available domestically, enabling them to produce a wider range of goods and services.
4. Increased Competition: Exposure to international markets fosters competition, which can lead to better quality products and services, innovation, and lower prices for consumers.
5. Diverse Product Offerings: Consumers benefit from a wider variety of products and services, enhancing choice and satisfaction.
6. Job Creation: As businesses expand into new markets, they often create jobs, contributing to lower unemployment rates and improved living standards.
7. Technological Transfer: Trade facilitates the exchange of technology and expertise between countries, promoting innovation and efficiency in production processes.
8. Foreign Exchange Earnings: Exporting goods and services generates foreign currency earnings, which can strengthen a country’s financial position and support economic stability.
9. Cultural Exchange: International trade promotes cultural interaction and understanding, enriching societies through exposure to different customs, practices, and ideas.
10. Risk Diversification: Engaging in global trade allows businesses to diversify their markets, reducing dependence on any single economy and mitigating risks associated with local downturns.
11. Strengthened International Relations: Trade relationships can foster diplomatic ties and cooperation between countries, contributing to global stability and peace.

International Trade versus Local Production

Food Security

The debate between local food production and international trade in food products is complex and often contentious. Limited studies have compared the environmental impacts of each approach, and scientists emphasize the importance of considering region-specific environmental effects.

Key Points

1. Demand and Production: A 2020 study revealed that local food crop production alone is insufficient to meet the demand for most food crops under current production and consumption patterns. The study indicated that for 72–89% of the global population, local production could not fulfill food needs within a 100-kilometer radius as of early 2020.
2. Environmental Impact: While food miles—the distance food travels from production to consumption—are often highlighted in discussions of carbon emissions, research shows that they are a relatively minor factor in overall emissions. However, increasing food localization could offer significant environmental benefits, such as improved recycling of energy, water, and nutrients.
3. Regional Harvest Differences: For certain foods, regional variations in harvest seasons may make it more environmentally friendly to import from distant areas rather than relying on local production. This can include the use of greenhouses for local production, which may consume more resources than importing certain crops.
4. Trade-offs: Balancing the benefits of local food production with the advantages of international trade involves considering factors like sustainability, resource efficiency, and food security.

Bank guarantees and standby letters of credit (SBLCs) play crucial roles in facilitating international trade by providing security and confidence to both exporters and importers. Here’s how each is used:

Bank Guarantees in International Trade

1. Performance Guarantees:
   • Used to ensure that exporters fulfill their contractual obligations. If the exporter fails to perform as agreed, the beneficiary can claim the guaranteed amount from the bank.
2. Tender Guarantees:
   • Required during the bidding process for projects. They assure the project owner that the bidder will honor their proposal if selected.
3. Advance Payment Guarantees:
   • Protects buyers who pay in advance. If the seller fails to deliver the goods or services, the buyer can claim the advance payment from the bank.
4. Customs and Duty Guarantees:
   • Often needed for importing goods. They ensure that any customs duties will be paid, allowing goods to clear customs without delay.

Standby Letters of Credit (SBLCs) in International Trade

1. Payment Assurance:
   • SBLCs serve as a payment guarantee to the seller. If the buyer defaults on payment, the seller can draw on the SBLC to receive the agreed amount from the bank.
2. Collateral for Financing:
   • Buyers can use SBLCs to secure financing from banks, enabling them to procure goods without upfront cash payments.
3. Facilitating Trust:
   • SBLCs help build trust between trading partners, especially in new or uncertain business relationships, as they reduce the risk of non-payment.
4. Support in Disputes:
   • In case of disputes regarding contract fulfillment, SBLCs provide a mechanism for payment without lengthy legal processes.

In summary, #bankguarantees and #standbylettersofcredit are essential tools in international trade, providing the necessary financial security to facilitate transactions between buyers and sellers across borders.

International trade often play a crucial role in meeting global food demands and the benefits are undeniable. Countries trade with each other because it’s mutually beneficial. Both parties get the chance to purchase goods and services that they otherwise wouldn’t be able to afford or produce while at the same time making a profit on the transaction.

Understanding the interplay between these approaches is essential for developing effective food security strategies that consider environmental impacts and regional needs.

Related Readings

General Credit Finance and Development Limited is a Licensed Money Lender that was incorporated in Hong Kong on APRIL 03, 1973 with company registration number 0032754. 

Our website blog is a free university that can transform anyone into a world-class financial analyst. If you enjoyed this article, please share it so others can read it too.

To keep learning and developing your knowledge of global trade and finance, we highly recommend the additional resources below:

• UNDERSTANDING BG/SBLC MT760
• Bank Guarantees vs. Standby Letters of Credit
• What is a Bank Guarantee (BG)?
• The Advantages of Standby Letters of Credit (SBLC) for Businesses in Financing