International trade

International trade is the exchange of goods and services between countries. An import is the purchase of a good or service made abroad and an export is the sale of a home-made good or service abroad.

A nation trades because it lacks the raw materials, climate, specialist labour, capital or technology needed to manufacture a particular good. Trade allows a greater variety of good and services. Specialization and trade increase the productivity of nation’s resources and allow for larger output than otherwise. Nations can benefit from an absolute advantage if they can produce a good at a lower cost than other countries or a comparative advantage if they can produce a good at a lower relative opportunity costs than other countries. For instance, France has the climate and the expertise to produce better wine than Brazil. Brazil is better able to produce coffee than France. Each country benefits by specializing in the good it is most suited to making. Through free trade based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources and a higher level of material well-being than without it.

One factor which makes international trade different from domestic trade is the involvement of more national currencies. This problem is resolved in foreign markets where currencies are traded and in this way imports and exports are facilitated. The currency can be trade on flexible floating rates or by fixed rates. Exchange rates among major currencies are free to float to the equilibrium market levels.

Protectionism occurs when one country reduces the level of its import because of: infant industries. If firms producing new-technology goods are to survive against established foreign producers then temporary tariffs or quotas may be needed. Unfair competition. Foreign firms may receive subsidies or other government benefits. They may dumping ( selling goods abroad at below cost price to capture the market ). Perhaps the most frequently heard argument in favour of restriction says that domestic firms and workers must be shielded from the ruinous competition of countries where wages are low. It suggests that domestic better paid workers are in danger of getting lower wages or perhaps even losing their jobs. Therefore, it is up to the government to place restriction on the goods produced by cheap foreign labour.

Perhaps the most popular and visible restrictions on trade are tariffs, special taxes imposed on imported goods, which make the imported goods more expensive to domestic consumers and thus less competitive with domestically firms. Tariffs raises the price of import, reduces the demand for import, raises demand for home-produced substitutes, raises revenue for the government.

The other restriction are quotas. Quotas restrict the actual quantity of an import allowed into a country. They can be more effective than tariffs, because sometimes a product would be imported in large quantities despite high tariffs.

Apart from these two main types there are many other restrictions, perhaps not so visible, but still very important: Exchange controls set limits on the amount of foreign exchange made available to importers, to citizens traveling abroad, or for investments. Some nations have strict licensing requirements. They require that their domestic importers obtain licences and by restricting the issuance of these licences, they effectively impede imports. Embargoes are mostly laid on imports from, or exports to enemies during wars, countries where human rights are suppressed. Administrative barriers include above all unnecessary bureaucratic red tape in customs procedures or taxes favouring locally produced goods.