International trade is the exchange of goods and services between countries. In economics, goods are items that people value—for example, food, clothes, and books. Services are activities performed that have value, such as legal advice or police protection.
International trade permits countries to specialize in producing the things they are best suited to make with the resources they have. In economics, resources are considered to be anything that makes up the actual or potential wealth of a country. Countries benefit by producing the goods for which they have an advantage and buying other goods from other countries. International trade makes it possible for more goods to be produced and for more human wants to be satisfied than if each country tried to produce everything it needed within its own borders.
The greatest volume of international trade takes place between the advanced industrialized countries. This trading happens because many of the people in those countries earn enough money to purchase large amounts of goods. In addition, those countries have the most specialized industries.
By the early 2020’s, world merchandise trade, as measured by exports, was about $25 trillion a year. World exports of commercial services totaled about $7 trillion annually. The world’s leading exporters of goods and services include China, France, Germany, Japan, the Netherlands, and the United States. Most world trade is carried out by private exporters and importers. Only a small part is handled by governments.
The United States and world trade.
The United States is one of the world’s leading trading nations. The jobs of thousands of American workers depend on how U.S. products and services sell in other countries. The profits of many businesses and the incomes of many farmers in the United States also depend on U.S. exports. The United States exports much of its annual production of such agricultural commodities as cotton, soybeans, tobacco, and wheat. Businesses producing computer equipment, aircraft, machinery, and other high-technology products also export much of their output.
Imports also aid the economy. Americans import many raw materials and foods that they either cannot produce at all or cannot produce in sufficient quantities. These goods include coffee, tea, bananas, sugar, copper, iron ore, nickel, and petroleum. The United States also imports many kinds of manufactured consumer goods such as textiles and clothing, and durable goods such as steel, automobiles, and machinery.
International trade is a two-way process. For example, when Americans buy British goods, they supply the British with dollars that can be used to buy U.S. goods and financial assets, such as U.S. bonds. If a country wishes to sell to other countries, it must also buy goods and financial assets from other countries.
Why nations trade.
Trade takes place between nations for the same reasons it is carried on within a country. For example, trade between Australia and Japan is similar to trade between Wyoming and Rhode Island. In both cases, regions specialize in producing particular goods because they have resources that make such specialization sensible and profitable. Both Australia and Wyoming have abundant space and few people. This is the best combination of resources for efficient cattle raising. Japan and Rhode Island have little space, but they have much skilled labor and capital. Such a combination makes for efficient industrial production. Australia and Wyoming specialize in cattle and sell meat to Japan and Rhode Island, respectively. On the other hand, Japan and Rhode Island specialize in industrial products and sell them to Australia and Wyoming.
Goods are bought and sold on the basis of their price. People want to buy the cheapest goods available. These goods will be made in nations that can produce them at low cost. For this reason, Japanese industrial goods will be priced lower than similar Australian products.
World trade benefits people in two chief ways. First, consumers can get more goods at lower cost when countries specialize in certain goods and exchange them. If every country tried to be self-sufficient and make everything it needed, goods would be far more expensive. Second, scarce resources can be used more efficiently if each nation specializes in the goods and services that they have a comparative advantage in producing. Comparative advantage is central to the modern theory of international trade. If a country is the most efficient in the world at producing two items, for example, lead and steel, that country is said to have an absolute advantage for producing both items. But if steel is far more valuable than lead, even a nation with the absolute advantage in producing lead may lose by producing it. It may be far more beneficial for the country to concentrate on making steel, for which it has a comparative advantage. Then, the country can import lead from a country less efficient in producing it. The more efficient country gains from buying lead and making steel.
Government trade policies
influence the volume of trade between nations. In domestic trade, goods may move freely from one part of a nation to another. In international trade, governments often place artificial barriers against the free movement of goods from one country to another. One such barrier is a tax on imports called a tariff. A tariff is usually part of a system of import duties placed on goods coming into the country. The tariff makes these goods more expensive. Thus, it encourages consumers to buy from domestic companies. Another trade barrier, the quota, limits the quantity of imports allowed. Generally, an importer has to get a government permit before bringing goods into the country when there is a quota on such goods. The practice of establishing trade barriers to help domestic firms is commonly referred to as protectionism.
Trade barriers usually reduce the volume of international trade, raise prices to consumers, and deprive nations of the benefits of specialization. All nations create such barriers, however, for several reasons. Local producers and workers are sometimes unable to compete with more efficient producers in other countries. This can spur local producers to pressure their governments to protect them from foreign competition. Also, in some cases, countries prefer not to be dependent on foreign sources in the event of war. They often protect industries considered vital to their national interest, even though the goods could be obtained more cheaply from other countries in peacetime.
In the decades after the end of World War II in 1945, the United States and other advanced industrialized countries significantly reduced their trade barriers, especially on imports of manufactured goods. This reduction was accomplished through a series of trade negotiations under the General Agreement on Tariffs and Trade (GATT). These negotiations have been continued, and broadened to include services and agriculture. The World Trade Organization (WTO) was created in 1995, and since then, GATT negotiations have been held under its sponsorship. In addition, such regional arrangements as the European Union and the North American Free Trade Agreement have eliminated all or many of the trade barriers that once existed between their member countries.
Since the 1960’s, many of the developing nations of Asia, Latin America, and Africa have lowered or eliminated their trade barriers to increase their economic productivity and welfare. Russia and other former Communist countries have done the same since the late 1980’s and early 1990’s.
Various international organizations cooperate in world trade matters. The most important is the World Trade Organization, which oversees trade agreements among its member nations. The Organisation for Economic Co-operation and Development (OECD) was designed largely to aid economic growth in its member countries. OECD members include the United States, Canada, Japan, many Western European nations, and numerous other advanced industrialized countries. The United Nations Conference on Trade and Development (UNCTAD) deals mainly with the problems of less developed countries.
