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What is international trade: All you need to know about its importance and advantages

International trade is the process of exchange of goods and services across international territories. In this blog, learn about types, advantages and how international trade is profitable for businesses and the economy.

Picture walking on the streets of Japan or Canada and spotting Indian handicrafts used as décor in restaurants – this is the influence of international trade that you are experiencing. While it is a moment of pride for us to spot Indian goods abroad, it is also giving makers of these goods a sense of success – not just monetarily but also emotionally.

With international trade growing across the world, it has become easier for businesses, not just in India but globally, to buy and sell goods from different countries. There’s no doubt that trade between countries enhances the world economy and brings in more opportunities for innovations and revenue.

What is international trade?

International trade is the process of exchange of goods and services between countries. This includes both imports and exports and via any mode of transportation – air 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.

Why does international trade happen?

International trade allows domestic markets to provide a variety of goods and services to their citizens that they would have otherwise been unavailable or restricted. Some of the key reasons why international trade is practised widely are:

Availability of resources

Different countries are rich in different resources. Resources like petrol and even consumables are required across the world, but not every country produces it. These resources could also be land, labour, capital and natural resources including steel, gold and diamonds. For example, Middle East countries have rich oil reserves, and so they are capable of exporting oil to countries that do not have domestic oil fields.

Production of goods

Due to the non-availability of a few natural resources, it becomes impossible for a country to produce all types of goods that require such raw materials. The other factors that impact production capabilities are labour, capital and services that are accessible at various rates across the world. This is why international trade is necessary.

Cost of production

Countries usually find it profitable to create only those goods and services that can be produced efficiently with minimum effort and expense. For example, India is home to many spices as it holds the benefit of agricultural lands that many international countries do not have. Thus, India is one of the top exporters of spices across the world.

Technology

Technology is another factor that creates the demand for importing and exporting goods and services. Many countries face problems due to the limitation of technology and infrastructure. Services such as banking, communication, advertising and transportation use modern-day technology and countries who hold expertise in this sector help other countries through international trade.

What are the benefits of international trade?

International trade contributes to better business opportunities, higher living standards, thus, leading to improvement in the world economy, while also providing customers with the variety to choose from products across the globe. Some of the advantages of international trade are:

Utilization of resources

Through the establishment of international trade, several countries use their locally available resources and raw materials by exporting it to other countries that need them. For instance, countries in the Middle East export oil – which has a high demand in countries like India.

More variety for customers

Apart from comparative advantage and relative input costs, one of the key benefits to customers from international trade is a range of products. For instance, Indian ethnic wear is sold in marketplaces across the world, like Gucci from Italy is available in India. This allows customers to choose from a large variety depending on their tastes and preferences.

Competitive pricing

As a result of international trade, the global market has become more competitive. This competition encourages countries to produce high quality goods to grow their exports. As more producers market their goods, individuals get the advantage of competitive pricing.

Economy growth

As more countries engage in international trade, foreign investment increases. When producers invest money or resources in producing goods outside of their country of origin, it is termed as Foreign Direct Investment (FDI). A country may realize that labor is cheaper in another country and choose to build a manufacturing plant there to produce its goods to cut production costs.

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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 – consider the barter system as an example here, where two countries agree to trade a commodity in return for another commodity. 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.

Did you know?

A trade agreement is a contract or an agreement made between two or more countries that outlines the structure and mechanism of work to ensure mutual benefit in the field of trade and commerce.

Easy international trade via e-commerce

Owing to access to technology, the internet has been the major driving force behind the evolution of international trade. E-commerce has eased the ability of businesses to import and export products around the world. NASSCOM has estimated that the share of current online-led exports in total exports from India is likely to increase 45 times by 2030¹.

Indian exporters too are increasingly opting for e-commerce exports to sell internationally. Providing access to 18+ global marketplaces across the globe, Amazon Global Selling makes the export process easy and hassle-free. Whether you are a multi-city store, local seller, upcoming startup or a seasoned exporter, irrespective of your business size, you can export your products and establish your business on the world map. Warehousing, compliance, shipping, delivery and returns - Amazon Global Selling assists you in every step to help you run a successful export business.

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Frequently Asked Questions

Is international trade more profitable than domestic trade?

Domestic trade is the exchange of goods within a particular country. However, 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. Exporting from India helps Indian sellers reach more customers – more customers, more sales. With e-commerce, international trade has become easier and simpler.

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Why is international trade so vital for global economy?

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

What is the future of international trade?

All major trading economies have witnessed a rise in imports and exports in the last decade. The overall record for international trade in 2021 noted was $28.5 trillion with an increase of 25% in 2020. Global trade has been beneficial for economies and will continue to grow strong towards the development of the world².

Published on July 22, 2022.

Sources:
1. https://wits.worldbank.org/countrysnapshot/en/WLD
2. https://www.worldbank.org/en/results/2018/04/03/stronger-open-trade-policies-enables-economic-growth-for-all
3. https://www.investopedia.com/insights/what-is-international-trade/#toc-what-are-the-benefits-of-international-trade-for-a-business
4. https://www.imf.org/external/pubs/ft/fandd/basics/trade.htm
5. https://unctad.org/news/global-trade-hits-record-high-285-trillion-2021-likely-be-subdued-2022#:~:text=%E2%80%9COverall%2C%20the%20value%20of%20global,the%20COVID%2D19%20pandemic%20struck.

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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.