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International trade

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International trade is defined as trade between two or more partners from different countries (an exporter and an importer). Early international trade consisted mostly of barter transactions.

International trade is also a branch of economics. Traditionally, international trade is justified in economics by comparative advantage theory. New developments include in patterns of international trade: the integration of countries into trade blocs (e.g., European Union, NAFTA, EFTA, CEFTA) and globalisation.


Regulation of international trade

Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the nineteenth century, especially in Britain, a belief in free trade became paramount and this view has dominated thinking among western nations for most of the time since then. In the years since the Second World War multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure.

Communist and socialist nations often believe in autarchy, a complete lack of international trade. Fascist governments also placed great emphasis on self-sufficiency. No nation can meet all of its people's needs, however, and every state engages in some trade.

Free trade is usually most strongly supported by the most economically powerful nation in the world. The Netherlands and the United Kingdom were both strong advocates of free trade when they were on top, today it is the United States which is its greatest proponent.

  • This is not completely true. UK, in its height observed mercantilist policy. Today, the highest tariff rates are found among the most industrialized nations. Both the United States and Japan rank among the highest in the list for tariffs in the following areas: textiles and apparel, and agricultural goods. Since developing nations most often have comparative advantage in those areas with protectionist policies, it is not surprising to see developing nations continuously redressing their grievances via World Trade Organization. Also not surprising to observe is that the citizens of United States were less eager than of Mexico to sign the NAFTA (North American Free Trade Agreement), largely due to Mexico's low wages, which leads to comparative advantage in labor intensive goods.

Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however.

During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression leading to a collapse in world trade that many believe seriously deepened the depression.

Risks in international trade

The risks that exist in international trade can be divided into two major groups:

Commercial risks

  • Risk of insolvency of the buyer
  • Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
  • Risk of non-acceptance

Political risks

  • Risk of cancellation or non-renewal of export or import licences
  • War risks
  • Risk of expropriation or confiscation of the importer's company
  • Risk of the imposition of an import ban after the shipment of the goods
  • Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages

See also

Last updated: 05-12-2005 15:28:12
Last updated: 05-13-2005 07:56:04