What is international trade and its importance?Posted on: November 2, 2022
by David Diaz
We live in an age of globalisation, where different nations across the world trade goods and services. This has therefore seen the development of international trade and international trade agreements. As global trade has grown, the economies of different countries have become reliant on exports and good international relations and many supply chains also rely on raw materials from different countries even before the finished product is ready to ship. Some of the largest and most successful global companies have managed to build a strong customer base by understanding different trends in supply and demand across the world. However, international trade has seen various challenges over the past few years including the Coronavirus pandemic, political tensions between China and the USA, Brexit, the war in Ukraine, and the impact of the climate crisis on raw materials.
International trade is important because countries rely on other countries for the import of goods that can’t be readily found domestically. If a country specialises in the exports of goods, it may have more supply of certain raw materials than there is demand in its own markets. Or it may have a certain expertise, for example, in technology or manufacturing that leads to demand in the international market. International trade creates the global marketplace upon which the world economy relies for prosperity.
The International Trade Centre (ITC) provides trade statistics on imports and exports classified by product groups across 200 countries. It’s a useful free resource to understand the specialisations of certain countries and to help solidify trade development strategies. The ITC is particularly focused on introducing small businesses in developing countries to international markets and supporting the United Nations Global Goals including ending poverty and protecting the planet.
What are the benefits of international trade?
International trade involves the licensed exchange of goods across borders. It leads to the establishment of trade agreements and trade policy. These encourage harmonious relationships between nations that rely on one another for a better standard of living across their populations. When there is disharmony, sanctions and trade restrictions are often imposed to block the movement of assets.
The European Union is an example of how countries can utilise free trade agreements to improve their standing in the international market and increase GDP while contributing to the world economy. Free trade is when member nations of a union become borderless in terms of trade, meaning that tariffs are not charged on imports and exports. Since the United Kingdom left the European Union, it has been attempting to forge trade agreements with other nations around the world.
The concept of the European Union grew in the wake of the Second World War as did the increase in world trade. Tariffs on industrial products fell steeply and in the 25 years following the war, world economic growth averaged approximately 5% per year. This high rate can partly be attributed to the lower trade barriers. During the same period, world trade grew even faster with an average of approximately 8%. Liberal trade policies that facilitate the unrestricted flow of goods and services tend to heighten competition and cultivate innovation, leading to successful business.
Comparative advantage remains, arguably, the most powerful insight according to economists. Comparative advantage states that even if a country is not as good at making a particular type of good as another country, it still stands to gain from trade. As the World Trade Organization (WTO) points out, it is virtually impossible for a country to have no comparative advantage in anything, simply by the nature of it being comparative.
What is the impact of international trade on the environment?
Global trade has a direct impact on the environment and climate change. About 90% of world trade is transported by sea and shipping is responsible for about 3% of global carbon emissions. That may not sound like a lot but that’s about 1 billion metric tonnes of carbon dioxide. The aviation industry is also recognised as contributing 2.5 % of all global carbon emissions. With the shipping industry experiencing staff shortages and multiple backlogs in the past few years, Amazon established its own air cargo operations to maintain its logistical schedules. The shipping industry is committed to total decarbonisation by 2050 and similarly, the aviation sector has pledged to be net zero by 2050.
However, the focus is not just on carbon. The demand for consumer goods puts pressure on the earth’s natural resources. For example the manufacture of smartphones, computers, and tablets requires precious metals and minerals such as copper, tellurium, lithium, cobalt, and manganese. Similarly demand for food products such as palm oil, coconuts, and avocados strains the supply chain, increases air freight, creates higher prices in the local markets, and causes soil degradation when intensive farming methods are used. Intensive farming also decimates insects and wildlife due to the use of pesticides and fertilisers, which has a knock-on effect on the entire ecosystem. When pesticides and fertilisers then enter the water system, this can alter the biosphere further.
The World Bank believes that “Fighting climate change is vital to equitable global development and poverty reduction” and that international trade can have an important role to play in this endeavour. In 2021, The World Bank released a report, The Trade and Climate Change Nexus: the Urgency and Opportunities for Developing Countries, that explores this in depth.
As extreme weather events happen more frequently and rising sea levels have the potential to reshape the trade map, both developed countries and developing countries will have to consider the impact on business. Ultimately, business is reliant upon stability and sustainability and so these considerations will need to be built into the trade system moving forward.
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The continual shifting of geopolitical power and economic trends means that international business and trade flows are also changing. From redefining value chains in challenging circumstances to understanding the developing economies that will have an impact on world trade, an International MBA can give you the edge in a rapidly changing world. Find out more about how you can gain an online International MBA with the University of Sunderland while you continue to work and build your career.