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International trade: Meaning, benefits, and importance

International trade is the exchange of goods and services across global territories. Learn about types, advantages, and their importance in this blog post.

Picture walking through the streets of Singapore or Canada and spotting Indian handicrafts being used as decor in shops and restaurants—this is the power of international trade. International trade allows Indian businesses to reach global markets, unlocking opportunities for growth, innovation, and revenue. In this blog post, we’ll explore the types of international trade, their benefits, and how they contribute to business success and economic progress.

What is international trade?

International trade is the exchange of goods and services between countries. This includes both imports and exports via any mode of transportation—air, land, and ocean freight. Import and export together fuel economic interactions and growth between countries.

● Export: Process of selling goods and services to other countries.
● Import: Process of buying goods and services from other countries.

Reasons for international trade

Countries engage in international trade for various reasons, driven by economic, strategic, and developmental goals. Some key reasons are as follows:

Access to scarce resources

International trade allows countries to trade abundant resources and purchase resources scarce or absent in their own region.

Specialization and efficiency in production

International trade enables countries to focus on producing goods where they have a comparative advantage in resources, technology, or expertise. By importing products that are less efficient or costlier to produce domestically, nations can enhance economic efficiency and make optimal use of their resources.

Exchange of technological skills and resources

International trade fosters the exchange of new technologies, skills, and ideas, boosting innovation and economic development.¹

Importance of international trade

Some factors that contribute to the importance of international trade as are follows:

● Expands market reach:

Companies can market their products internationally, resulting in higher revenue streams.

● Develops global collaboration

Trade agreements strengthen diplomatic ties and foster peaceful relations among countries.

● Boosts worldwide production

International trade enhances the global production landscape as nations leverage their unique strengths and resources.

● Creates employment opportunities

As businesses expand into international markets, they generate new domestic job opportunities.

● Enables cultural interchange

International trade facilitates the exchange of culture, as nations share ideas and practices along with their products.²

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What are the benefits of international trade?

International trade can bring various benefits to countries that participate in it. Some of these are as follows:

Utilization of resources

Countries can better utilize their natural resources by exporting surplus resources in the absence sufficient local demand.

Greater choice for customers

Services and products which are not available in a particular country can be imported from other countries. Customers can choose from a wider variety of goods, depending on their tastes and preferences.

Growth in economic activity

International commerce enhances the economic activity of a country and consequently its GDP. When goods are being both exported and imported in great quantities, there is a rise in employment levels, more industries are set up, and the quality of life improves.

Creation of jobs

International trade generates jobs as companies diversify their workforce. Global trading produces employment opportunities in fields like manufacturing, transportation, shipping, and distribution.

Strengthening of international relations

Export and import strengthen diplomatic relations among nations. When countries are dependent on each other through trade, they have a higher incentive to make cordial and mutually beneficial policy decisions.

Scope of international trade

International trade offers vast opportunities for businesses and nations to connect and grow on a global scale. Key aspects of its scope include:

● Export and import

Businesses gain access to new markets by exporting their products and meet local demand by importing goods and services, driving growth and diversification.

● Global supply chains

International trade enables the integration of global supply chains, enhancing production efficiency and the seamless distribution of goods and services across borders.

● Trade agreements

Bilateral and multilateral trade agreements smoothen trade barriers and provide consistent guidelines for cross-border transactions.

● E-commerce

Online platforms make it possible for businesses to grow and sell their goods internationally without needing physical presence in overseas markets.

● Foreign Direct Investment (FDI)

Investments in foreign operations boost economic activity, facilitate technology transfer, and encourage global economic integration.⁴

What are the types of international trade?

International trade is broadly categorized under two types:

Bilateral trade

Bilateral trade is the exchange of goods between two countries, where both countries agree to sell goods and services to each other. For instance, country X might export machinery to country Y in exchange for oil.

Multilateral trade

Multilateral trade is the exchange of goods between more than two countries. One country might enter into trade agreements with multiple countries at a time.

Difference between international trade and foreign trade

International Trade

Foreign Trade

Encompasses all trade between different countries.

Refers specifically to a single country's trade with other nations.

Focuses on global economic interactions.

Concentrates on a particular country's import and export activities.

Deals with multilateral trade agreements and global economic policies.

Concerns bilateral trade agreements and national trade policies.

Involves complex international supply chains and global value networks.

May involve simpler import-export relationships between two countries.

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Frequently Asked Questions

1. Is international trade more profitable than domestic trade?

Domestic trade is the exchange of goods within a particular country while international trade is the exchange of goods across international territories and borders. For business owners, expanding business into international markets opens up new sources of revenue and profit. With e-commerce, international trade has become easier and simpler.

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2. Why is international trade so vital for the global economy?

As more countries engage in international trade, foreign investment increases. A country may realize that labor is cheaper in another country and choose to cut production costs by building a manufacturing plant there. International trade allows foreign currency to flow into other countries, which helps boost their reserves.

3. What is the future of international trade?

All major trading economies have witnessed a rise in imports and exports in the last decade. Global trade has been beneficial for economies and will continue to grow strongly and contribute to the development of the world.⁶

4. What are the regulatory institutions of international trade?

Regulatory institutions such as the World Trade Organization (WTO), International Monetary Fund (IMF), and various regional bodies oversee international trading systems.

5. What creates the need for international trade?

The need for international trade arises from disparities in resource availability, technological advancements, consumer demand differences, and varying production costs among countries.

6. What are common barriers to international trade?

Common barriers include tariffs (taxes on imports), quotas (limits on quantities), non-tariff barriers (regulations), and subsidies provided by governments to domestic industries.

7. What are the types of operations involved in international trade?

The types of operations include export operations (selling goods abroad), import operations (buying foreign goods), entrepot operations (importing goods for re-export), and transit operations (goods passing through one country enroute to another), among others.

Published on July 22, 2022.

Sources:
1. https://byjus.com/commerce/meaning-and-reasons-for-international-trade/
2. https://www.imf.org/external/pubs/ft/fandd/2009/12/basics.htm
3. https://www.americanexpress.com/en-us/business/trends-and-insights/articles/advantages-international-trade/
4. https://www.pw.live/exams/commerce/international-trade/
5. https://www.pw.live/exams/commerce/international-trade/
6. https://www.worldbank.org/en/results/2018/04/03/stronger-open-trade-policies-enables-economic-growth-for-all

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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

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