Introduction

International trade is an important chapter as it helps students become familiar with international business concepts and their benefits. It is commerce between two or more countries that involves the exchange of commodities and services. Bilateral trade is defined as an exchange between two countries only, whereas multilateral trade is defined as an exchange between more than two countries.  Read on to know more about the international trade concept and history of international trade in detail.

What is International Trade? 

International trade is the exchange of capital, goods, and services across international borders and national boundaries.

History of International Trade

The theory of international trade is one of the oldest branches of economics and business studies. International trade is called “mercantilism” and it emerged in 17th and 18th century Europe. 

Advantages of International Trade 

• It provides access to a wider range of goods and services from other countries.
• It allows the country to obtain goods that it does not manufacture.
• It aids in the promotion of peace among trading nations.
• It allows the government to focus on areas of production where they believe they have an edge.
• It generates revenue for the country by collecting taxes and licence fees from the country’s importers and exporters.
• It allows the country to get rid of excess commodities and services, reducing waste.
• It either directly or indirectly creates job opportunities for the residents of that country.
• It may contribute to the country’s development by importing capital items.
• It promotes the smooth movement of people.

Disadvantages of International Trade

• It could lead to the demise of local industries, as people will prefer to buy foreign goods. It’s also possible that the collapse will result in job losses.
• It could also result in the importation of potentially dangerous foods and services, such as narcotics and pornographic materials.
• It may lead to an over-reliance on imported goods, particularly crucial goods, turning the country to be dependent on other countries and infringing on its sovereignty.
• If a country’s primary source of income is imported commodities, it may suffer during times of crisis.
• It’s possible that import inflation may hit the country.
• As a result of their interactions, they may acquire negative culture from other countries.
• If the import is excessive, it may result in an unfavourable balance of payments.

Terms of trade

It is the exchange rate between the country’s exports and those from other countries. That is to say:

Terms of trade =

export price index

import price index

It calculates the value of export in relation to import so that a country can decide whether or not its commerce with another country is beneficial.

Favourable trade terms will cause the country to spend less on imports while gaining a large amount of foreign exchange from other countries.

International trade- Scope

The international trade concept has a broad scope:

Imports and Exports of Merchandise

The export and import of physical items to and from other countries are referred to as merchandise export and import. Trade-in products, which include just tangible goods and exclude trade-in services, are also known as merchandise export and import.

Import and Export of Services

It’s also known as “invisible trade.” Transportation, communication, warehousing, distribution, advertising, banking, and tourism are all examples. Intangible products are traded in service exports and imports.

Licensing and Franchising 

These are two different types of licensing and franchising. Licensing is a commercial agreement in which a company (licensor) offers access to its patents, copyrights, trademarks, or technology to a company in another country in exchange for a fee known as royalty. Licensing and franchising are both comparable concepts. It’s a phrase used in the context of service delivery.

Investments from Other Countries

Foreign investments entail putting money into a foreign country in exchange for a financial return. There are two categories of foreign investments:

Foreign Direct Investment occurs when a company invests directly in properties in foreign nations, such as plants and machinery, with the goal of manufacturing and distributing goods and services in those countries. On the other hand, portfolio investment is a collection of investments.

International Business – Modes of entry 

The act of transporting goods and services from one country to another is known as exporting, whereas Importing is the process of purchasing goods from other countries and bringing them into one’s own country.

Exporting and Importing

Direct Exporting/Importing: Indirect exporting/importing, a company approaches overseas buyers/suppliers directly and handles all aspects of the exporting/importing process, including shipment and financing of goods and services.

Indirect Exporting/Importing: Indirect exporting/importing occurs when most of the import/export tasks are handled by intermediaries, with the firm’s involvement being minimal.

Contract Manufacturing or Outsourcing

Contract manufacturing is a business in which a firm or company agrees with one or a few local manufacturers in another country to make things according to their specifications.

Outsourcing is another term for contract manufacturing.

There are three major types of it:

• Manufacturing of specific components.
• Assembling components into finished goods.
• Manufacturing of finished goods, such as clothes.

Conclusion

The International trade concept promotes the free movement of production elements across the borders of the countries involved. It allows governments to earn foreign currency that they can use to pay for their imports. A country may be able to get goods and services at a lower cost than if they were manufactured locally. During difficult times or tragedies such as wars, the country can rely on its trading partners for aid. It creates rivalry between imported and domestically produced items, resulting in quality improvements. Due to rising market demand, it allows the country to use its natural resources fully.