What is International Trade?

As its name implies, international trade is the exchange of products, services, and money across national borders; essentially trade between countries. When consumers in the U.S. purchase Swiss-made watches, Guatemalan-grown fruits, Chinese-made toys and electronics, and Japanese-manufactured automobiles, they experience the end result of international trade. Also known as foreign trade, international trade has been maintained since the dawn of time. Trading goods were transported on the backs of tradesmen across tribal boundaries, and bartered and sold among neighboring, and, hopefully, accommodating tribesmen. The Silk Road between Europe and Asia is one example of the sometimes beneficial, sometimes troubling essentials of international trade. Asian silks and spices were traded for European technology and weapons, with varying benefits and consequences. Domestic trade is the purchase and sale of products and services within a particular nation’s borders, and is inherently limiting to a modern national economy. International trade, conversely, raises national gross domestic product (GDP) by providing vastly expanded economic opportunity. It is, therefore, incumbent upon the global economic community to promote fair trade between nations. In addition, the ability of nations to trade freely with all others is also vital for profits. Free trade, fair trade, and profits are the cornerstones of global economic well-being. There is a somewhat cyclical nature to international trade. Poorer nations, able to provide cheap labor and lower production costs, are subservient to richer and more consumer-oriented nations. As the productive nations gain wealth through their productivity, the consumer nations are forced to become productive themselves through the transfer of their capital to the productive nation. Thus, the process is reversed. The burgeoning imbalance of trade between the United States and China is one example of the cycle where the consumer nation is becoming economically beholden to the producing nation.


International trade is most commonly recognized in the exchange of goods or products. However, trading services, such as expertise in a particular field, or the ability to facilitate the trade of goods, is another common form of foreign trade. Trading capital on the foreign exchange market (FOREX) represents a third facet of international trade. Capital, or currency, held for foreign trade fluctuates in value hourly due to political, business, weather and other conditions and factors from nation to nation. Trading currency in the international market attempts to profit from the rising value of one nation’s currency through selling the lower value of another nation’s capital. Trading capital is also the amount of money designated by a trader to pay the costs of foreign trade, such as tariffs, subsidies, transportation, etc.

Importance of International Trade
The buying and selling of goods and services across national borders is known as international trade. International trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes. One of the most controversial components of international trade today is the lower production costs of “developing” nations. There is currently a great deal of concern over jobs being taken away from the United States, member countries of the European Union and other “developed” nations as countries such as China, Korea, India, Indonesia and others produce goods and services at much lower costs. Both the United States and the European Union have imposed severe restrictions on imports from Asian nations to try to stem this tide. Clearly, a company that can pay its workers the equivalent of dollars a day, as compared to dollars an hour, has a distinct selling advantage. Nevertheless, American and European consumers are only too happy to lower their costs of living by taking advantage of cheaper, imported goods. Even though many consumers prefer to buy less expensive goods, some international trade is fostered by a specialized industry that has developed due to

national talent and/or tradition. Swiss watches, for example, will never be pricecompetitive with mass produced watches from Asia. Regardless, there is a strong market among certain consumer groups for the quality, endurance and even “snob appeal” that owning a Rolex, Patek-Philippe or Audemars Piguet offers. German cutlery, English bone China, Scottish wool, fine French silks such as Hermes and other such products always find their way onto the international trade scene because consumers in many parts of the world are willing to foster the importation of these goods to satisfy their concept that certain countries are the best at making certain goods. One of the biggest components of international trade, both in terms of volume and value of goods is oil. Total net oil imports in 2005 are over 26 million barrels per day (U.S. Energy Information Administration figures) (Note: Imports include crude oil, natural gas liquids, and refined products.) At a recent average of $50 per barrel, that translates to $1billion, three hundred million, PER DAY. The natural resources of a handful of nations, most notably the nations of OPEC, the Organization of Petroleum Exporting Countries, are swept onto the international trade scene in staggering numbers each day, and consumer nations continue to absorb this flow. Other natural resources contribute to the movement of international trade, but none to the extent of the oil trade. Diamonds from Africa, both for industrial and jewelry use, wheat and other agricultural products from the United States and Australia, coal and steel from Canada and Russia, all flow across borders from these nations that have the natural resources to the nations that lack them. Despite complaints about trade imbalances, effects on domestic economies, currency upheavals, and loss of jobs, the reality of goods and services continually crossing borders will not go away. International trade will continue to be the engine that runs most nations.

Benefits of International Trade
International trade has flourished over the years due to the many benefits it has offered to different countries across the globe. International trade is the exchange of services, goods, and capital among various countries and regions, without much

used to transport tea from China. outsourcing of manufacturing and services. The global trade can become one of the major contributors to the reduction of poverty. In the 1700s fast sailing ships called Clippers. The restrictions to international trade would limit the nations to the services and goods produced within its territories. David Ricardo. a classical economist. and they would lose out on the valuable revenue from the global trade. It is also one of important sources of revenue for a developing country. The international trade accounts for a good part of a country’s gross domestic product. Adam Smith. Nations with strong international trade have become prosperous and have the power to control the world economy. and spices from Dutch East Indies to different European countries. and spices through the Silk Route in the 14th and 15th century. With the help of modern production techniques. in his principle of comparative advantage explained how trade can benefit all parties such as individuals. and social significance of international trade has been theorized in the Industrial Age. This is one of the most important concepts in international trade. with the use of principle of absolute advantage demonstrated that a country could benefit from trade. The rise in the international trade is essential for the growth of globalization. with special crew. as long as goods are produced with different relative costs. and countries involved in it. companies. another classical economist. transnational corporations. and rapid industrialization. the international trade system is growing and spreading very fast. if it has the least 4 . highly advanced transportation systems. political. International trade among different countries is not a new a concept. The economic.hindrance. Traders used to transport silk. The net benefits from such activity are called gains from trade. The benefits of international trade have been the major drivers of growth for the last half of the 20th century. History suggests that in the past there where several instances of international trade.

can still be benefited from focusing on export of goods for which it has the least opportunity cost of production. the country is not the most competent producer for any goods. i. Benefits of International Trade can be reaped further. to increase production of another good by one unit.e. A country with no absolute advantage in any product. i. per unit input yields a higher volume of output.absolute cost of production of goods.e. 5 . benefits of trade are dependent on the opportunity cost of production. The opportunity cost of production of goods is the amount of production of one good reduced. Acceptance: The act of giving assurance in writing on the face of a bill of exchange stating the payment of a bill on the date of maturity. Some important benefits of International Trade          Enhances the domestic competitiveness Takes advantage of international trade technology Increase sales and profits Extend sales potential of the existing products Maintain cost competitiveness in your domestic market Enhance potential for expansion of your business Gains a global market share Reduce dependence on existing markets Stabilize seasonal market fluctuations International Trade Terms Here are some important terms related to international trade. According to the principle of comparative advantage. if there is a considerable decrease in barriers to trade in agriculture and manufactured goods.

shipping company Chaser: Reminder sent by the collecting (or DC issuing) bank to the importer. Bill of Exchange (B/E): An unconditional order in writing. Bill of Lading (B/L): A receipt for goods for shipment by sea. are treated as Bills Receivable by both the remitting branch and the receiving branches. It is a Document of Title Bill Receivable (BR): Bills which are financed by the receiving branch. a bill drawn without a genuine underlying commercial transaction. whether drawn under a DC or not. signed by the person giving the order. Beneficiary: A payee or recipient. Accountee: Another name for the applicant or opener of a documentary credit Amendment: Any changes to the term of a DC must be initiated by the applicant and issued and advised to the beneficiary Applicant: Any party.Acceptance Credit: A documentary credit. Carrier: Person or company whose business is the conveyance of goods e. Back-to-Back Credit: A credit issued on the security of an existing credit ("the master credit"). repeating a request for payment. usually the exporter. addressed by one person to another. which requires the beneficiary to draw a usance bill for subsequent acceptance by the issuing Accommodation Bill: In the context of fraud.g. Bill for Collection (BC): Document(s) or check(s) submitted through a bank for collection of payment from the drawee. 6 . usually the importer. who applies for a documentary credit. usually of money or a party in whose favor a documentary credit is established.

DC Bills: Bills drawn under documentary credits. Collection Bank: The bank in the drawee's country that is instructed to collect payment from the drawee. and carrying the exporter's instructions. by land or air.usually the importer or the Collecting Bank. Dishonor: Non-payment or non-acceptance. Deferred Payment Credit (DPC): Using stipulated documents. often abbreviated to “credit”.see “Collections – Introduction”. Clean Import Loan (CIL): A loan granted to an importer for payment of import bills. a bank can effect payment on a DC at a maturity date that is specified or determinable in the credit terms. Collection Order: A form submitted by an exporter to the remitting or negotiating bank.Clean Collection: A draft with no documents Collection attached . without the Bank having any claim to the goods. 7 . Consignment: Shipment of goods. Demurrage: A charge made by a shipping company or a port authority for failure to load or remove goods within the time allowed. accompanied by documents. Documentary Credit (DC): A conditional undertaking by a bank to make payment. Consignee: The person or company/bank to whom the goods are delivered . Contingent Liability: A liability that arises only under specified conditions. Discounting: An accepted usance bill of exchange is sold at an amount less than its face value. Consignor: The party who sends goods by ship.

on which negotiation/payment of a DC can take place. Foreign Bill Purchased (FBP): A bill remitted to a correspondent bank in which the remitting bank is financing the exporter Forward Exchange Contract: Contract between the bank and its customer to buy/sell a fixed amount of foreign currency at a future date at a specified rate Freight: Goods OR the cost of transporting goods. Financed Bills: Bills sent on collection in which the remitting bank has a financial interest. usually in the country of the beneficiary.Documents Against Acceptance (D/A): Instruction for commercial documents to be released to the drawee on acceptance of the bill of exchange. Documents of Title: Documents that give their owner the right to the goods. and import loans (LAI).e. Export Line: Financing for exporters. Incoterms: Shipping Terms International Chamber of Commerce (ICC): The international body which promotes and facilitates world trade. Import Line: Finance facilities for importers covering documentary credits (DC). and which codifies world trade practices in various publications 8 . Due Date: Maturity date for payment Expiration Date: Latest date. bills receivables (BR). i. Bill of Lading. Import License: A permit issued by the importing country's authorities for goods that are subject to import licensing restrictions. Documents Against Payment (D/P): Instruction for documents to be released to the drawee only on payment.

Non-DC Bills: Bills not drawn under DC i. Master Credit: In back-to-back operations. the original export credit against which the second credit is opened Maturity: Payment due date of a usance bill or promissory note. Outward BC: Bill received for collection by the (OBC) Remitting Bank. Non DC bills are financed collections and DC bills are non-financed collections. as it now has other meanings. which is a promise to hold goods as security. Normally no interest is paid on these deposits which are held in the Bank’s name whenever possible. Non-Financed Bills: Bills sent on collection in which the remitting branch has no financial interest. Paying Bank: The bank that makes payment to the beneficiary of a payment DC after presentation to it of documents stipulated in the DC. Net Weight: The weight of the merchandise before any packaging. Letter of Hypothecation: Loan-holders for goods imported on a collection basis must provide a letter of hypothecation.Inward BC: A bill received by the import department of the collecting bank (IBC). 9 . Avoid using it. Loan Against Imports (LAI): Loans granted to Imports customers for payment of bills. sent on a collection basis (D/P or D/A). handled by the Exports Department. the applicant.e. Marginal Deposit: Money held by the Bank to secure the opening of a DC. Issuing Bank: The bank that opens a documentary credit at the request of its customer. Letter of Credit (L/C): Out of date term for documentary credit. usually bills under our DC.

The right to claim a refund from another party who has handled a bill at an earlier stage. In collection transactions the principal is generally the exporter. Revocable Credit: Credit that may be amended or canceled without notice to the beneficiary. Retirement: To pay or settle an outstanding bill or import loan.Perils of the Sea: These are accidents or casualties of the sea due to heavy or tempestuous weather Power of Attorney: Authority given to one party to act for another Presentation: The act of requesting the importer's payment/acceptance of an import bill Presenting Bank: The bank that requests payment of a collection bill. Recourse. In other cases the principal may be the customer who opens a DC. which remits the bill to the collecting bank. 10 . Remitting Bank: The exporter's bank. which authorizes the advising bank to make an advance payment to the beneficiary Reimbursing Bank: The bank that the DC-issuing bank has named to pay the value of the DC to the negotiating or paying bank. Revolving Credit: A credit that is automatically reinstated each time a draw takes place or upon receipt of authorization from the DC-issuing bank. Example: payment to the bank by the importer. Red Clause Credit: A credit with a clause. This may be the collecting bank or its nominated branch Principal: The initiator of a given transaction whose instructions are followed at all stages. Promissory Note: A signed statement containing a written promise to pay a stated sum to specified person at a specified date or on demand.

which allows the drawee to have a usance (period of credit or term). Standby Credit: Established as security for facilities granted at another branch or bank Shipping Register: The register that lists all goods for which the imports department is handling documents. Snags: Irregular bills. whether for import. Usance Bill: A bill of exchange.Shipment Date. Transferable Credit: Permits the beneficiary to transfer all or some of the rights and obligations of the credit to a second beneficiary or beneficiaries Trust Receipt (T/R): A T/R is issued for a TFGA transaction and is based upon the terms of the TFGA. Transit Interest: The amount of interest that is incurred on a DC from the date of negotiation to the date that the bank receives reimbursement. Self-Liquidating: A transaction is said to be self-liquidating when there is a known source of funds available for its settlement on the due date. 11 . Trade and Credit Information (TCI): The bank department that provides details of the creditworthiness and business background of traders and manufacturers. Trade Financing General Agreement (TFGA): An agreement between the bank and all of its import and export customers that gives the bank recourse in all transactions. listed according to the ship carrying the goods. Technical D/A: A D/P transaction in which the bank purchases bills but it does not control the goods. or export. A bill of lading evidences that goods have been received on board. Therefore the date that is entered on the B/L is considered to be the shipment date for documentary credit purposes.

Over the next several weeks. the process of international trade involves the transaction of services. But overall. goods and monetary instruments among and between countries. its health is critical to our own success. It’s critically important that the world has an unending supply of accurate translation workers 12 . we will be contributing new articles that focus on the important role that translators play in terms of the global economy. Waive: A drawer can waive the right to collect BC and/or interest charges under circumstances as set forth in ICC 522. timely and affordable translation services. The Benefits of International Trade and its Dependencies on the United States The term Global Economy refers to the economic system of world and the interdependency among the various nations of the world. Uniform Rules for Collections. While we may not always think about the global economy as being very meaningful in our lives. An undertaking is usually synonymous with the actual delivery of the security.Undertaking: A written promise to deliver a security within the time specified. businesses can have trusting relationships with their trade partners and trade can flourish. With the availability of accurate.

and capital flow freely across U. such as German Translation Services agencies are a necessity for such activities. To illustrate the importance of imports and exports to the language translation industry. Developments such as these also improve the economic outlook of many countries. In other cases. Since the 1970s. Korean 13 . Domestic trade differs from global trade in the fact that it centers around the exchange of goods and services within one country. Toyota. Certain professional service providers. Americans can take full advantage of the opportunities of the international marketplace. Korean engages in trade with Spanish speaking countries when it purchases bananas from Honduras. The term world trade might also be used to describe the area of trade that takes place over international boundaries. However. So what does the term trade mean in today’s global economy? The term ‘Trade’ can imply a certain industry. such as brain surgery.S. coffee from Colombia. consider how Korean Translator companies benefit from buying pepper from the Hindi speaking country of India. and electronic components from Japan and China. Further. like Japanese Translation Services companies. This is why international trade takes place. the term trade can also be used to signify people who work in a specific field such as the real estate trade. services. along with increased numbers of communications agencies. Advances in technology and transportation. like the building or construction trade. the terms can also mean a particular occupational field.because corporations that operate on a global level like Google. help to create more international trade by breaking down barriers. Importing is when country A buys goods or services from country B. Trading goods and services allows countries to meet their individual wants and needs as well as to help their own economy. General Motors and Ford must make decisions based on good data. International or global trade creates a number of advantages that include the simplified flow of goods. Further. borders. businesses in one country may produce better products or services at cheaper prices than businesses in other countries. for this paper we will be discussing trade as it relates to the exchange of services and goods in an international context. world trade and the need for highly accurate and specialized translation services have increased considerably. In addition.

like engineers and health care workers are also imported and exported by Korea. the USA earns more in sales to Australia than Australia earns in sales to the USA. It involves exchange of goods and services between the trades of two countries. the USA balance of trade is favorable vis a vis Australia. which means the United States takes in less money from sales to France than France takes in from sales to the United States. In other words. The United States has an unfavorable balance with France. Human wants were limited. As an example. There is an increasing demand for foreign trade because of the following reasons:  The natural resources are unevenly distributed. human wants are increasing and as such no man was considered to be self-dependent. Many countries have a trade surplus with country A and a trade deficit with country B. Like this no country can live in isolation and claimed the status to be self-sufficient. In the early stages of human civilization. A trade surplus exists when a country has more exports than imports. 14 . Whether a good is an export or an import depends on whether the country is buying or selling it. A balance of trade is what you get when you determine the difference between exports and imports during a specific period of time. The services of professionals. which were made in Korea. production was confined as per consumption. A trade deficit occurs when a country has imported more than it has exported. Investment in other countries is also undertaken by Korea when it establishes a business there. The advantages and disadvantages of foreign trade:The trade between two or more nations is termed as foreign trade or international trade. Because of this reason countries have trade relationships with each other. export trade and entrepot trade. Exports are goods and services that one country sells to another country.translators is intimately involved in the advertising and selling process when Korea sells items to other countries abroad. are also known as exports. Foreign trade consists of import trade. These products. Now-a-days. The primary objective of foreign trade is to increase foreign trade and increase the standard of living of its people.

Ø Large Scale production: It ensures large production because the production is carried on to meet the demand of its people as well as world market.   The presence of specialization and division of labour. Ø Increased Standard of living: It ensures more production to meet the demand of the people of different countries. These restrictions stand on the progress of foreign trade. 15 . Ø Stable Price: It ensures the presence of stable price by avoiding wide fluctuations in prices. This difference in language creates problem in foreign trade. As foreign trade involves trade between two or more countries. Ø Availability of all types of goods: It enables a country to import those goods which it cannot produce. Large scale production also ensures a great deal of internal economies which reduces the cost of production. Foreign trade is not free from difficulties. By increased production. Θ Foreign trade involves preparation of a number of documents which also creates difficulties in the way of foreign trade. Different countries have difference in economic growth rate. The following are some of the advantages of foreign trade: Ø Optimum use of Resources: Foreign trade helps in the optimum use of natural resources and avoid wastages of resources. Θ Each country has its own language. there is diversity of languages. It also increases the standard of living by increasing more employment opportunities. it becomes possible to increase income and the standard of living of its people. The presence of the theory of comparative cost. The following are some of the important disadvantages of foreign trade: Θ It is a long distance trade and as such it becomes difficult to maintain close relationship between the buyer and the seller. It tries to equalise the world price. Θ Some restrictions are imposed on export and import of commodities.

or it might be based on the market value of the item. Though the risks are covered through insurance. like most trade barriers. quotas. Trade Barrier Trade barriers are any of a number of government-placed restrictions on trade between nations. and embargoes. Tariffs are a fairly common form of trade barriers. The most common sorts of trade barriers are things like subsidies. tariffs. In practice. although in some cases they may go both ways. tariffs were a large source of government revenue. as all nations utilize some assortment of trade barriers for their own benefit. as they could easily be collected as a tax on ships as they landed in the nation. Some tariffs are placed simply to earn money for the government. Tariffs nearly always are placed on goods that are brought into the country. allowing for completely free and unfettered trade. and are essentially taxes on goods as they cross the borders of a nation. Historically. Tariffs. no nation fully embraces free trade. duties. Other tariffs exist 16 . as opposed to goods sold as exports. The term free trade refers to the theoretical removal of all trade barriers. it involves extra cost of production because insurance cost is added to cost. may be imposed for different reasons.Θ Foreign trade involves a great deal of risks because trade takes place over a long distance. This might either be a flat fee on an item. however.

however. which effectively bans the vast majority of food imports from the United 17 . to ensure the citizenry has a constant supply of affordable food. Embargoes basically prohibit the import or export of anything with another country. to make imported goods more expensive than they might otherwise be. although the most brutal of the trade barriers. and high labor standards. it is usually not viewed as an act of outright aggression. the cost of producing a single widget might be around ten units. some countries have begun using trade barriers that are not tariffs. restricting the acceptable use of things like tariffs. Steel is also often subsidized.as a form of protectionism. for example. for example. For example. This is often done as a form of punishment. Subsidies may actually be intended simply to make certain key goods affordable to citizens of the nation. Historically. A number of free trade bodies exist in the world to try to curtail the use of trade barriers by nations. are heavily subsidized. and are often placed to protect domestic industries. although a declaration of war is often accompanied by an embargo. in order to protect domestic industries. but the end result can still be to make imports non-competitive. but have similar effects. the embargo was used as a war tactic. which can be crucial during times of war when normal shipping avenues may be cut off. to make sure that domestic widgets always remained competitively priced. In modern times. Many food crops. if a country has a fairly high wage. and so was often considered a declaration of war. to ensure a nation always has a domestic steel supply. then imports of that country’s widgets could easily drive the domestic industry out of business. or even to make it unfeasible for widgets to be imported at all. and it enforces strict rules against member nations. Subsidies are another of the common trade barriers. An embargo can be seen as the most extreme of the trade barriers. If a nearby country can produce a widget for three units. So the country might place a restrictive tariff on widget imports. or to try to force the country to undergo radical change internally as a result of a weakened economic state. The European Union. does not allow the import of many genetically-modified organisms. The World Trade Organization is perhaps the widest reaching of these bodies. As a result.

Some of the most common trade barriers are: Tariffs: Taxes levied on products that are traded across borders are called tariffs. Trade barriers aim to hike the prices of imported products in order to secure the domestic industry against fierce competition from foreign products.States. embargoes and subsidies as trade barriers. imposing trade barriers are against the concept of free trade. groups like the WTO have begun to look at these forms of trade barriers as well. Most commonly. popularized by developed nations. and to strip them when possible. duties. Almost every trade barrier works as a tool to ensure a protectionism policy. However. governments impose tariffs essentially on imports and not on exports. Two most popular types of tariffs are:  Ad valorem: This tariff involves a set percentage of the price of the imported goods. a country’s government employs tariffs. Trade barriers refer to government-imposed policies to restrict international trade. Subsidies help to either sustain economic activities that face losses or reduce the net price of production. However.  Subsidies: Subsidies work to foster export by providing financial assistance to locallymanufactured goods. Specific: This refers to a specific amount charged by the government on import of goods. Quotas: 18 . In recent years.

Thus. A protectionism regime causes over-allocation of resources in the protected sector and exploitation or under-allocation of resources in free trade sectors. With trade barriers in place. Import restrictions affect international trade relations.Import quotas are the trade limits set by the government to restrict the quantity of imports during a specified period of time. leading to enhanced consumer satisfaction. 19 . the government curbs consumer rights to enjoy competition in the market. In the modern world. imposing trade barriers prevents the nation from fully realizing the economic benefits of such globalized trade. which in turn leads to a decline in exports. embargoes are imposed during wartimes or due to severe failure of diplomatic relations. Economic Impact of Trade Barriers In times of flourishing international trade. the protectionism regime that is employed to protect certain sectors actually tends to retard the growth of the entire economy. This usually leads the country into economic disequilibrium. Free trade environments offer greater and better choices in the market. Embargo: This is an extreme form of trade barrier. Embargoes prohibit import from a particular country as a part of the foreign policy. which hampers growth.

The value of balance of trade is expressed in domestic currency and is denoted by the symbol. providing price competition. ‘NX’. Debit items include imports. creating jobs and demand. Also referred to as "trade balance" or "international trade balance" The balance of trade is one of the most misunderstood indicators of the U. a trade deficit is not a good thing during a recession but may help during an expansion. whether a trade deficit is bad thing is relative to the business cycle and economy.S. foreign aid.BOT Balance Of Trade . without increasing prices. countries like to export more. domestic spending abroad and domestic investments abroad. However. Balance of trade is the largest component of a country's balance of payments.BOT means the difference between a country's imports and its exports. 20 . Thus. many people believe that a trade deficit is a bad thing. For example. provides goods beyond the economy's ability to meet supply. foreign spending in the domestic economy and foreign investments in the domestic economy. In a strong expansion. countries like to import more.Balance Of Trade . Credit items include exports. A country has a trade deficit if it imports more than it exports. economy. which limits inflation and. In a recession. the opposite scenario is a trade surplus.

A country’s balance of trade comprises a major segment of balance of payments. ♣ External pressures: 21 . trade balance comprises those products that a country trades on with other countries. Some countries like the US provide subsidies to local manufacturers for exported goods and services.Trade balance is a reflection of a country’s international market and its domestic consumption. Composition of Trade Balance For a given country. domestic policies are required to boost production and international trade. Factors that affect trade balance are: ♣ Demand and supply: The demand and supply trend defines the cost of domestic products to be sold in the international market. ♣ Domestic business: Sound. ♣ Trade agreements: Bilateral agreements govern international trade and define the products and their prices in the global context. It also affects the country’s overall GDP for that particular period. This is an effective mechanism to quantify a country’s overall economic transactions with the rest of the world.

Proactive market policies are required to ensure that a country’s trade balance remains favorable. If the dollar depreciates (the dollar becomes weaker and the foreign exchange rate decreases). Countries that are mostly oil exporters or IT hubs tend to generate favorable trade balance due to less competition in the international market. dollar appreciates (the dollar becomes stronger and the foreign exchange rate increases). and domestic and foreign price levels. Effects of the foreign exchange rate: The way the foreign exchange rate affects exports and imports has already been discussed in fair detail. It fortifies trade ties with other countries and generates immense possibilities to stem job losses. the foreign trade deficit falls. national incomes. These bans are enforced by either individual countries or international organizations such as the WTO or IMF. balance of trade tends to remain unfavorable. In a nutshell. inflation and unemployment. 22 . A sound trade balance represents an important benchmark as it reflects economic stability between nations. External pressures also work in the form of trade bans. Determinants of the Balance of trade There are three major determinants of the trade balance or net exports: Foreign exchange rates. ♣ Exchange rate: o For nations with low exchange rate ♣ values. if the U.Many countries export items that face heavy competition in international market. This results in market segmentation and low pricing. causing the foreign trade deficit to rise.S. exports decline and imports increase.

If the U.Effects of changes in domestic and foreign incomes: Changes in national incomes in foreign countries as well as in the United States have an important effect on net exports.S. policy makers do not have complete control of the behavior of U. an increase in incomes in foreign countries leads to an increase in U. specifically ignoring the latter. some of which can be bought from the United States. they cannot unilaterally influence rates of economic growth in foreign countries.S. U. U. a rise in U. Roach. national income declines.S. If national incomes in foreign countries fall. leading to a decline in the foreign trade deficit as well. U. exports to these countries will decline. income increases U. As a result. causing the foreign trade deficit to rise. consumers demand more goods and services. the demand for goods and services by U. net exports.S. both home and abroad. consumers falls. it follows that changes in net exports are also tied to rates of economic growth. causing the foreign trade deficit to rise (assuming other factors do not change). a phenomenon described by economist Stephen S. While U. imports.S. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile.S. If national incomes in foreign countries rise.S.S. if the U. would be a case of absolute advantage 23 . On the other hand. As a result. From the preceding discussion. foreign residents demand greater amounts of goods and services. and some of this increased demand is for goods and services produced in other countries. exports. As a result. national income rises.S. where one country exploits the cheap labor of another. policy makers have some control over the rate of economic growth in the United States. Global labor arbitrage. Conditions where trade imbalances may be problematic Those who ignore the effects of long run trade deficits may be confusing David Ricardo's principle of comparative advantage with Adam Smith's principle of absolute advantage.S. so does the demand for imported goods and services—this leads to a decrease in the foreign trade deficit.S.

high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP). the U. Japan. In 2006.S.S. the CEO of General Electric. Over the long run. is borrowing to fund consumption of imports while accumulating unsustainable amounts of debt. high mortgage debt ($9 trillion). The opportunity cost of a forgone tax base may outweigh perceived gains. 24 . the U. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand. and a rise in illegal immigration. In 1985. France. high unfunded Medicare liability ($30 trillion). high financial institution debt ($12 trillion). Some economists contend that the U. These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President's 2006 State of the Union address. to increase its manufacturing base employment to 20% of the workforce. began its growing trade deficit with China. Jeff Immelt. especially where artificial currency pegs and manipulations are present to distort trade. Germany. The U. the primary economic concerns focused on: high national debt ($9 trillion). economy has been characterized by slower GDP growth.that is not mutually beneficial. 2009. Few economists believe that GDP and employment can be dragged down by an over-large deficit over the long run.S. high unfunded Social Security liability ($12 trillion). over the long run. called for the U.S. high non-bank corporate debt ($9 trillion). Others believe that trade deficits are good for the economy. commenting that the U. Since the stagflation of the 1970s. Wealth-producing primary sector jobs in the U.S.S.S. such as those in manufacturing and computer software have often been replaced by much lower paying wealth-consuming jobs such those in retail and government in the service sector when the economy recovered from recessions. nations with trade surpluses tend also to have a savings surplus.S. generally has lower savings rates than its trading partners which tend to have trade surpluses. and Canada have maintained higher savings rates than the U. On June 26. high trade deficits.

adjustments tend to occur. However. when a national trade imbalance expands beyond prudence (generally thought to be several percent of GDP. foreign aid may fill the gap while in rapidly developing economies a capital account surplus often off-sets a current-account deficit. for example. and facilitate a return to balance or (more likely) an over-shooting into surplus the other direction. the importer can no longer continue to purchase more than is sold abroad. In simple terms. for several years). and may continue until such reserves are depleted. Economic impact of balance of trade Most economists do not believe that trade deficits are inherently good or bad. there are some economies where transfers from nationals working abroad contribute significantly to paying for imports. but must be judged based on the circumstances in which they arose. Finally. but is able to find funds elsewhere. Large imbalances may sometimes be a sign of underlying economic problems or rigidities. This is likely to have exchange rate implications: a sharp loss of value in the deficit economy’s exchange rate with the surplus economy’s currency will change the relative price of tradable goods. are more than sufficient to pay for Hong Kong’s domestic goods export shortfall. Bangladesh and Mexico are examples of transferrich economies. At such a point.Conditions where trade imbalances may not be problematic Small trade deficits are generally not considered to be harmful to either the importing or exporting economy. trade deficits are paid for out of foreign exchange reserves. respectively). the distortions likely to be caused by large flows of wealth out of one economy and into another tend to become intolerable. The Philippines. While unsustainable imbalances may persist for long periods (Singapore and New Zealand’s surpluses and deficits. Service exports. an economy may be unable to export enough goods to pay for its imports. An example 25 . More complexly. In poorer countries.

The mere possibility thereof is likely to result in a rise in interest rates and/or a depreciation of its currency. or to seeing more and more assets being owned by the rest of the world. in general terms. some generations may gain at the expense of others (In other words: citizens of countries that run up cumulative trade deficits leave it to their children to pay the bill. Further. In addition. it must be financed by running down net international assets relative to the case without a deficit.S. for whatever reasons. A trade surplus may appear to be a good thing but may not always be so.includes a situation where exchange rates have been fixed or pegged for political reasons at levels impeding a correction of a trade imbalance.5 million U. 26 . Deficits may also have intergenerational effects: by shifting consumption over time. in the form of either interest and dividend payments to the rest of the world. such as the loss of 1. This may be done for example by selling assets. like the increase of the market share of multinationals and the international merging of stock exchanges decreases the relevance of trade balances of countries according to some sources. a country may find itself unable to meet its obligations. this ceases. a trade deficit may be good news if it is used to finance profitable domestic investments or if it is temporary and reflects a boom with strong domestic demand. jobs to China between 1989 and 2003.g. which may be problematic once the foreign demand dries up. It can lead to the loss of jobs. It is possible for the terms of trade to be lower than before if there is an improvement in the balance of trade (e. can only be sustained as long as the rest of the world is willing to finance it. If. Potential problems with persistent deficits therefore include the accumulation of foreign debt with associated interest payments or domestic assets passing increasingly into the hands of foreigners. if an export increase came about by lowering prices). country with a surplus may come to rely on foreign demand for its industry. though micro economists point out this has not been a gross job loss (the total employment level has actually increased). The effects of trade imbalances on employment are controversial. However. the consequences of globalization. In order to maintain a negative balance of trade.) A large trade deficit. through foreign direct investment or by international borrowing.

In financial terms. loans and aid from abroad. had imports been freely allowed. more broadly. long-lasting trade deficit can lead to foreign debt. Impact on other variables Trade balance is a component of GDP: other things equal. further preventing Japanese consumers from benefiting from the trade surplus. The positive balance was partly the result of protectionist measures that also caused the price of goods in Japan to be much higher than they would have been. If this impact is strong enough. it influences the balance of payments (which comprehends not only the trade balance but also income payments. The foreign currency Japanese companies earned overseas remained largely unconverted into yen in order to suppress the yen's value. In particular. Even before that this perspective materialises. a currency crises can erupt. it gives rise to the traditional Keynesian multiplier effect with consumption moving in the same direction. a surplus increases GDP and deficit reduces it. trade balance influence the total size and the composition of the current-account balance and. etc). on which a country has to pay interests.An example of an economy in which a positive balance of payments is regarded as a bad thing by some is Japan in the 1990s. If this debt is judged by market agents as unsustainable. the government can be induced to dampen GDP growth. the potential benefit from the trade surpluses were partly squandered by spending it on prestige real estate purchases in the United States that often proved unprofitable. Long-term trends 27 . In addition.

Trade imbalances are widespread throughout the world and persistent over time. meaning that in terms of materials a lot more is imported than exported. Physical trade balance Monetary trade balance is different from physical trade balance (which is expressed in amount of raw materials). Business cycle behaviour Trade balance tend to be strongly anti-cyclical: in boom periods it usually exhibits deficits. Often. While a foreign trade deficit can be held responsible for some lost jobs. Developed countries usually import a lot of primary raw materials from developing countries at low prices. even if it results in a deficit on the foreign trade balance. which risks jeopardizing growth with alternate phases of "stop-and-go". whereas in recessions a trade surplus can help inverting the business cycle. is not all bad. and a significant amount of value is added. poor countries have to rise much faster than them. it also provides consumers with lower prices and 28 . which are usually their main commercial partners. its physical trade balance (especially with developing countries) is negative. foreign trade. That means the ecological footprint of developed countries is may be larger than that of developing countries. The Politics And Economics Of Foreign Trade As is clear from the preceding discussions. In order to reduce the gap with rich countries. if footprint mainly depends on bulk size. these materials are then converted into finished products. But this leads to trade deficit. Although for instance the EU (as well as many other developed countries) has a balanced monetary trade balance.

on the other hand. and a negative balance is a trade deficit. opponents of the agreement put a lot of emphasis on the "sucking sounds" of jobs lost to Mexico. Countries that enjoy a trade surplus have more money flowing in than out. Balance of trade is the difference between the value of exports and imports within a specified period of time. A foreign trade deficit essentially creates a classic conflict between two groups —workers and consumers. the attention has turned to the trade imbalance with the People's Republic of China. This includes both money for the products the country exports and the money spent by foreign visitors to the country.greater choice. It so happens that workers tend to be better organized and they are. thus. A trade surplus indicates that there is more demand for the exports of a country than there is demand for foreign products and services. When a nation has a trade surplus. Debate on the foreign trade deficit in the popular media is often unbalanced. gain as explained above. it has more control over its own currency. 29 . During the North American Free Trade Agreement debates in the United States. able to influence government trade policy in their favor. Recently. The trade deficit with Japan is also often debated in a politically charged atmosphere. Consumers. A positive balance is a surplus. Exports include goods and services produced in a country and sold to one or more other countries. frequently resulting in Japan-bashing. Workers as a group may tend to lose due to lost jobs (but not all workers lose since jobs are created in import-related industries). Which group's interest will the government keep in mind in dealing with trade issues? The answer to this question often boils down to whichever group has the greater political influence. Country exports are of a higher value than imports. What Is a Trade Surplus? Trade surplus is a condition in which a country has a positive balance of trade with other countries. Positive balance of trade plays an important role in the economic growth of any country. There is therefore a higher employment rate within the country and the standard of living is increased.

Trade Deficit A Trade Deficit occurs when the value of a country’s imports exceed its exports for a specific period of time. for example. usually a year. which increases the cost of production. The relationship between imports and exports are called the trade balance. This limits inflation and provides a more varied supply of goods and services than is normally available. thus creating more demand and more jobs. If a country finds itself in a strong expansion. When the economy grows. would be adversely affected. As the demand for a country’s goods and services increase. but it also affects the price level and inflation rate in its economy. Increased demand will increase the cost of wages and raw material. Trade deficits can occur in both developing and advanced countries. as the trade surplus increases so does inflation. A trade deficit has a dampening effect on the economy in that it slows growth and increases unemployment as the demand for workers decreases. Producers and wage earnings. the output. On the other hand. however. There are drawbacks to the increase in trade surplus. 30 . or gross domestic product. When exports exceed imports it is called a trade surplus. This in turn generates additional income that augments the growth of the country’s economy. increases and citizens can afford a more expensive lifestyle. Therefore. Whether a deficit has a negative or positive effect depends on who is being affected. This leads to raised retail prices of goods and services. can be good from the viewpoint of the individual consumer because he or she would end up paying lower prices for goods. during a recession the economy would be better served by exporting more. A rise in net exports will force production to meet foreign demand by increasing demand for labor and resource goods and services. producers increase their output to meet the increased demand. Another measure of trade surplus and trade deficit is how they relate to the business cycle within an economy. Increasing the foreign trade deficit.Trade surplus in goods and services not only influences the level of employment within a country. one strategy is to import more and to provide more price competition.

For instance.6 billion indicated that the global recession had weakened the country’s exports. However. a trade deficit triggers repercussion during a recession. they consider a long-term trade deficit to be a wealth destroyer that can trigger job losses. for example. Reasons and Implications of a Trade Deficit A long-term trade deficit leads to an unstable economy. which in turn limits inflation. a trade deficit will reduce GDP. A growth-oriented economy focuses on imports to provide price competition. increase debts and lead to possible speculative attacks on currency. foreign debt and currency crises become concerns. Japan is also combating high trade deficit. this is not true. the US trade deficit pertaining to goods and services rose to $27. 31 .The United States. a trade deficit has numerous implications for a country’s domestic business cycle and economic situation. In contrast. where unemployment. In January 2009. as a certain level of trade deficit is required in a flourishing economy. Japan’s deficit of ¥952. has been running a trade deficit for many years. then a trade deficit can have beneficial effects. A recessive economy endeavors to generate more employment and raise the demand for domestic products by propelling exports.6 billion in March 2009. While economists state that a controlled short term trade deficit is manageable and in some cases necessary for growth and development. While a trade surplus contributes to the GDP of a nation. Hence. Agriculture-based economies may face a trade deficit due to:  The seasonal nature of trade. The layman normally thinks of a trade deficit as being bad. but if that deficit means that goods can be bought at a lower price and therefore corporate can increase their profit margins and consumers have greater spending power.

 Financial soundness of the domestic business. During the 1980s-1990s. which significantly impacts the trade balance  Low domestic production or substandard quality goods downgrade the monetary value of imports. Understanding and quantifying the reasons for a trade deficit is important. Argentina and Turkey faced severe economic depression due to an overvalued currency. The overvaluation of the domestic currency may also lead to a long-term trade deficit. Static exchange rates and high inflation rates lead to the overvaluation of a currency. A target-oriented industrial policy can level the trade balance. 32 . The poor performance of a specific industry may help to bridge the gaps through the implementation of reforms to boost production. Malaysia. Chile.

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