Global Trade

Updated on January 29, 2024
Article byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

What is Global Trade?

Global trade is the exchange of goods and services across international borders. Due to global trade, domestic consumers can access international products otherwise not produced by local industries.

Global trade comprises import, export, entrepot, foreign direct investment, job outsourcing, setting up production in other countries, and setting up of multinational companies. Global trade increases the reach of local traders and producers —manufacturers upgrade their products and services to suit global demands.

Key Takeaways

  • Global trade refers to the purchase or sale of goods or services outside geographical boundaries. It is a means of global economic interaction between the buyers and sellers of different countries.
  • Global trade enables local traders, artisans, and producers to sell their products in the international market. Also, the consumers get a wide range of local and imported goods and services.
  • However, international trade has made nations dependent upon one another for raw materials and certain commodities.
  • When goods are produced for export, the manufacturers ramp up production. Due to economies of scale benefits, higher output translates into a lower per-unit cost of production.

Global Trade Explained

Global or international trade is the buying and selling of goods or services across the globe. Alternatively, it also refers to capital investment made by one country into another. Traders belonging to different nations interact with each other and engage in business deals (export or import) to expand and grow.

Global Trade

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It thus makes the goods of one country available in the local market of another. International trade facilitates a truly global market wherever one goes; one can get French perfumes and cologne in the American market and Indian spices in the European market.

Usually, international trade improves the economic prospects of all parties involved, but it has various limitations. Some countries lack infrastructure for cross-border transportation; this discourages local traders from exporting or importing goods.

Moreover, some nations have started dumping cheap and incompetent products in the international market to make huge profits. Also, when the local market has a high demand for foreign products, local producers incur losses. Local manufacturers don’t always have the same investment capital to compete internationally. Thus, global trade can potentially become an exploitative market for under-developed countries—rich in natural resources and minerals. During wartime, imports and export become restrictive and expensive.

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Global Trade Types

International trade can be categorized into the following three types based on the inflow or outflow of goods or services:

  1. Import Trade: When a nation buys goods or services from a foreign country, it is termed import trade. For instance, China imports crude petroleum from Russia and Saudi Arabia.
  2. Export Trade: The countries that sell the products outside their geographical boundaries are said to engage in export trade. For example, America is the fourth largest car exporter in the European market.
  3. Entrepot Trade: Entrepot trade involves both imports and exports. Country A purchases commodities from country B; Country A then improves or creates something new from it and sells finished goods to Country C.

For instance, India imports raw sheep wool from Iran, China, and Kenya and exports the finished woolen yarn fabric to Sweden, Germany, and the US.

Examples

Let us understand the practical application of global trade by looking at a few examples.

Example #1

Let us assume that there are two countries, X and Y. X produces rice at a very low price (in comparison to Y). X is a developing nation. Y, on the other hand, cannot grow rice on its land despite having a flourishing economy—due to the unfavorable climate and soil.

Global Trade Example

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In such a scenario, global trade takes place between X & Y. To fulfill domestic demands, Y can buy as much as it needs from X. Likewise, by selling its excess yield to Y, X gains monetarily.

Example #2

Japan has a worldwide reputation for quality manufacturing. In 2020, the nation exported around 3.74 million vehicles (out of which 3.41 million were passenger cars). The figure is down from its previous year’s export figure of 4.82 million. But it is still considered a remarkable number amidst the Covid pandemic. North America is the largest importer of Japanese automobiles.

Example #3

As per the Singapore-Australia Free Trade Agreement (SAFTA), Australia and Singapore are strategic trade and investment partners. Australia imported goods worth $8.06 billion from Singapore in 2019, and the breakup was as follows:

  • Out of $8.06 billion, 57.3% of imports constituted mineral products.
  • $838 million of imports were of machinery, 20% of it in the form of digital CPUs.
  • $661 million in imports accounted for food products.
  • $575 million of imports comprised chemical products.

Benefits

The benefits of global trade are as follows:

  • Global Economic Growth: When goods and services are exchanged internationally, all involved parties incur an economic advantage.
  • Decreases Global Poverty: Increased trade activities worldwide bring down poverty levels.
  • Opportunity for Local Industries to Go Global: Local producers and traders get a chance to exhibit their goods and services in the international market.
  • Wide Range of Options: Consumers benefit from global trade as they get access to a variety of buying options.
  • Competitive Pricing: When goods are produced for export, the manufacturers ramp up production. Due to economies of scale benefits, higher output translates into a lower per-unit cost of production. Thus, firms can afford competitive prices for the international market.
  • Superior Quality of Goods: The local producers improve quality to compete in the global market.
  • Increases Employment Opportunities: When companies expand and go global, they require more workforce—which results in increased employment opportunities worldwide.
  • Progress of Under-developed Nations: Underdeveloped countries can strengthen their economic condition by increasing exports—an opportunity to generate foreign income.
  • Easy Availability of International Products: All thanks to global trade, consumers can now access international goods and services in their local market.
  • Worldwide Exchange of Technology: Countries open subsidiaries and production units in different nations and, by doing so, end up exchanging technology and processes globally.

Frequently Asked Questions (FAQs)

What are international trade theories?

Given below are the various classical country-based trade theories:
1. Comparative advantage
2. Absolute advantage
3. Mercantilism
4. Heckscher-Ohlin theory
5. Leontief Paradox
The different firm-based trade theories include:
1. Product life cycle
2. Country similarity
3. Global strategic rivalry
4. Porter’s national competitive advantage

How does global trade affect the world economy?

Global trade initiates the growth of the world economy by:
1. Enhancing the GDP and national income of the nations,
2. Flaring more global job opportunities,
3. Improving the local industries’ produce,
4. Facilitating the exchange of technology among countries,
5. Curtailing global poverty,
6. Helping the local businesses go global,
7. Providing a wide range of product options to the consumers, and
8. Ensuring competitive price and quality.

What are the disadvantages of international trade?

Global trade has the following drawbacks:
1. Sometimes countries dump cheap products into the worldwide market,
2. Many nations use international trade as a weapon during wars,
3. It may result in exploitation and draining of a nation’s natural resources,
4. It discourages the small or medium-scale local manufacturers and sellers, and
5. Often, underdeveloped nations that depend on exports to meet their domestic needs get exploited.

This has been a guide to Global Trade & its meaning. We discuss what is global trade, its definition, examples & free market benefits. You can learn more about it from the following articles – 

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