In this article, you will learn the basic subjects of International Trade and Business for beginners which are crucial to know before you start your own global trading journey.
International trade influences a whole range of activities including jobs, consumption, and the fight against poverty. It also affects the environment and relations among countries. In turn, trade is shaped by a host of influences ranging from natural resources to fashion.
Trade-related issues can give rise to strong feelings, and trade measures such as banning or limiting imports are often called for to respond to major economic problems.
An understanding of the benefits and downsides of trade, and of what trade policy can or cannot achieve, will help us to form our own opinions on debates about international trade.
If you are looking to expand your business, have you considered the advantages of international trade?
Maybe you think it is safer to focus on trade on your home turf. But venturing out of your comfort zone to trade internationally may make your business stronger, more successful, and more profitable.
We live in a global marketplace. The food on your table might include fresh fruit from Chile, cheese from France, rice from Thailand, and olive oil from Turkey. Your smartphone might have been made in China or South Korea. The clothes you wear might be designed in Italy and manufactured in Vietnam. The toys you give to a child might have come from India. The car you drive might come from Japan, Germany, or South Korea.
The gasoline in the tank might be refined from crude oil from Saudi Arabia, Mexico, or Nigeria. As a worker, if your job is involved with farming, machinery, airplanes, cars, scientific instruments, or any other technology-related industries, the odds are good that a hearty proportion of the sales of your employer, and hence the money that pays your salary comes from export sales. We are all linked by international trade, and the volume of that trade has grown dramatically in the last few decades.
In this article, you will learn:
- What is an International Trade, Really?
- A Brief History of International Trade
- Types of International Trade
- Unique Benefits of International Trade
- Risks Associated with International Trade
- How to Start an International Business?
Let’s dive in.
What is an International Trade, Really?
International Trade, economic transactions are made between countries. International trade refers to the exchange of goods and services between countries.
In simple words, it means the export and import of goods and services. Export means selling goods and services out of the country, while import means goods and services flowing into the country.
The need to conduct global trade primarily arises from the uneven distribution of natural resources. This leads to a division of labor development of technical know-how, and lowering of comparative cost, thus making some countries more suitably placed to produce certain goods or services. A smooth flow of international trade ensures that the world economy continues to thrive despite political, social, and cultural differences.
In the current state of the world, technological innovations have led to globalization and made the world a borderless whole, open to all forms of trade at all possible levels. No single country can isolate itself from the whole and work towards self-sufficiency.
A Brief History of International Trade
International trade has a very rich heritage steeped in humble beginnings. It started with the barter trade and went on to the mercantile system towards the end of the 17th century. Mercantilism basically promoted balanced trade that required the value of exports of a given country at any time to exceed that of imports in the same period. Profitability was calculated based on the difference between exports and imports and was referred to as the “balance of trade surplus”.
This system paid particular concern to the commodities comprising international trade. On this basis, exporting finished products was considered beneficial but exporting raw materials was frowned upon. The reverse was also true, importation of raw materials being favored over that of finished products. The system was therefore highly interventionist, with governments seeking to manipulate international trading activities in their home country’s favor.
This led to the next stage of liberalism in the 18th century during which Adam Smith wrote his book “The Wealth of Nations”. This book explained the important role of specialized production, a theory that formed the foundation for David Ricardo’s Comparative Advantage theory.
Comparative advantage is a law in economics that states that every country should specialize in a certain category of products to sell to others in export and import everything else for local consumption. This is what makes it possible for everyone around the world to access goods that might otherwise have been inaccessible.
These were essential steps in bringing the Mercantilist system to an end and ushering the world into a new economic era. Towards the start of the 19th century, the world adopted professionalism, but this too died down after some time. By the year 1913, gold was an internationally accepted medium of exchange and there was increased freedom for traders operating across borders.
Even though the First World War temporarily reversed the situation, currency fluctuations and economic recession soon got things back to normal. In 1927, the League of Nations organized the World Economic Conference and oversaw the development of the Multilateral Trade Agreement.
With time, countries realized that international trade organization regulations could not hold relevance for extended periods. This brought the rise of unique regulations and terms of trade for different countries that were updated every so often to keep up with changing trends.
International trade today is fully functional with every market still using the comparative advantage principle to choose their import and export product list. This makes it easy for traders to identify and focus on the products and services that allow them the most profitability.
Also, if you would like to learn more about the history of international trade, here is a link to our brief history of international trade article.
Types of International Trade
For practical purposes, international trade is divided into three major types. These are:
1 – Export Trade
Quite like its import counterpart, export trade is a type of international trade that relies on selling locally manufactured goods and services to foreign countries. In theory, it is considered to be just the opposite of import trade.
For example, India exports inorganic chemicals, oilseeds, raw ores, iron and steel, plastics, and dairy products to a country like China. In return, China exports electrical equipment, organic chemicals, silk, mineral fuels, and fertilizers to India. These goods are exchanged between both countries so that they can make the most of their respective production capacities.
2 – Import Trade
To put it simply, import trade means purchasing goods and services from a foreign country because they cannot be produced in sufficient quantities or at a competitive cost in your own country.
For example, India imports 82% of its crude oil requirements from countries like the UAE and Venezuela. This is because these countries possess massive oil fields and are quite competent in exploring, processing, and transporting oil at an economical rate.
Similarly, UAE imports agriculture and apparel-based products from India because it is easier and cheaper to import these, rather than produce them in their own country.
3 – Entrepot Trade
Entrepot trade, in simple terms, is a specific form of international trade that comprises both – import and export trade. Under this type, goods and services are imported from one country so that they can further be exported to another country.
This is to say that the imported goods are not used for consumption or sale in the importing country. Instead, the importing country just adds some value to the goods before exporting them yet again.
For example, if Turkey imports rubber from Thailand, processes it, and re-exports it to another country like Germany, it would be referred to as Entrepot trade.
Most countries deal in Entrepot trade because of the following reasons:
- Lack of access or direct connection between any two countries
- Better processing or logistical facilities available with a third country
- Absence of a trade agreement between two countries
- No trade finance in banking facilities available in the importing country
Unique Benefits of International Trade
International trade offers lots of advantages to individuals and countries as well. This is the main reason why the business has thrived over the years despite challenges. Let us take a look at some of the most outstanding benefits associated with it:
Lower Product Costs
This benefit results from two major reasons. First, it is easier for manufacturers to produce goods overseas at lower prices. This is especially the case in large manufacturing zones like China where economies of scale reduce production costs significantly. This advantage is passed on to consumers in the form of lower prices.
A second way in which this is achieved is through high competition. In the past when one company had a monopoly over a large area they would take advantage of this and charge whatever prices they deemed fit.
But in many cases today, there are numerous traders from different countries fighting to offer the best possible prices. High competition consistently brings prices down to the least possible profitable price.
Efficiency in Production Processes
The high competition also forces manufacturers to try and offer the most efficient in their operations. Some choose to come up with new ways to produce the same products. Others opt to improve existing processes for optimal efficiency.
More efficient processes usually result in lower energy consumption, decreased use of raw materials, lower labor costs, and many other advantages. This boon is again passed on to the consumer and they get higher quality products for lower prices. This often leads to more eco-friendly processes that reduce their toll on the environment.
Climate changes and other environmental factors greatly limit the kind of food we can access during any given season. This would mean going without a favorite fruit or other food product for as long as conditions are unfavorable for its growth or processing. But international trade has made it possible to access almost anything all year round.
It has also made it possible for less developed nations to gain from the technology in their more advanced counterparts. This is why almost everyone in the world now has access to electronic products like cell phones, TV sets, washing machines, refrigerators, laptops among others regardless of their location. This has served to improve the living standards of those in isolated places or third-world countries that do not manufacture such items.
Market for Surplus Produce
This benefit comes in handy, particularly for agricultural-based economies. Farm produce is inherently perishable and you have a surplus of it, you either need to get market fast or watch it rot. There are countries whose climate and geological conditions highly favor the production of one kind of food. This makes farmers tend to concentrate on that particular product as they are sure it will excel.
But when it does excel and everyone has an abundance of it then they are forced to sell at throwaway prices just to get rid of the surplus. With the export market ever at the ready, however, this no longer has to be the case. There is almost always a market that needs that surplus product and a means to get it there.
The same is true for manufactured products. At times production companies flood the market with similar products and supply overwhelms demand. At such times, overseas markets take up the excess and keep the manufacturers profitable.
Market Fluctuation Management
All markets in every part of the world are subject to highs and lows. There are certain periods of the year for instance when the demand for warm winter clothing is at an all-time high. But when summer comes no one needs them anymore and suppliers would have to rest till the next winter comes around.
However, on the international market, there has to be at least one country that needs warm clothing at any given time. This makes it easy for suppliers to remain in business all year round, moving with the season to take advantage of the demand. This has really helped traders to mitigate the effects of seasonal sales fluctuations and enjoy sustainable profitability and growth.
Risks Associated with International Trade
Like any other business, international trade also has its fair share of challenges. In fact, due to the sheer size of the market, these are often magnified beyond expectation. Consider the most outstanding ones:
As a new international trader, you might have to search long and hard for your first buyer(s). The result of such a hard search is that at times caution is thrown to the wind and judgment impaired. Desperation might creep in and make you forget to exercise diligence in verifying new clients.
If you happen to engage a crook you might suffer shock when after making a delivery you receive no payment and leave no trace of their existence online.
Seller risks are also magnified under the scope and volume of trade as well as distances involved. A manufacturer might fail to supply the right quantity of goods or might delay in making the delivery due to a variety of reasons. They might also fail to supply desired quality of products and compromise on your business reputation.
Third Party Risks
The import-export business is highly dependent on factors that are beyond your control. For instance, you might get a bill of exchange endorsed or a bank guarantee for the payment of goods. But when the time comes, they might fail to honor the agreement for one reason or another.
You might have taken insurance cover over your goods in transit. But in the event of loss, it turns out that the amount you took out does not fully cover your expenses leading to loss. Other third parties like inspection companies, shippers, customs agents, and others might also fail in their loss and cause you to lose inadvertently.
A country’s location may also severely impact your international trade deal. Country risks could take the form of political upheavals, economic downturns, and conflicts. Africa’s international trade has many times presented this challenge to traders due to instability in some countries in any one or all three of the above sectors.
At times also, government policies change before the completion of a trade deal and complicate matters. Countries with financial volatility are also subject to frequent currency fluctuations that could turn a profitable transaction into a complete loss.
How to Start an International Business
You might have figured out the dynamics of running a local business venture. But as you can tell from the above risks, running an international operation is not for the faint of heart. The most reassuring part of it is that no business, however small, comes completely risk-free. Furthermore, most of the challenges outlined above can be surmounted.
Take a look at the essential steps in setting up your import-export business that will improve your odds of success:
One of the first steps to set up any business is adequate preparation. In this case, you need to prepare a business plan that takes into consideration your international market. This will help you to assess your needs and set objectives.
Carry out foreign market research using the resources available online and at your local Chamber of Commerce. This will help you figure out what products would perform well in which markets and the complexities of getting there.
Evaluate Distribution Methods
There are as many different distribution strategies as there are product varieties. Establish the most viable method of getting your products to the intended market. This could be through intermediaries like agents, distributors, or agents. You could also opt for a joint venture with a company in that market or even set up a foreign subsidiary.
Regulations and Legal Aspects
This is often the toughest part of the international business setup process. Every market has a distinct set of regulations to govern the trade. These rules are ever-evolving and you need a reliable way to stay ahead of developments or risk incurring penalties.
Congratulations! You have officially learned International Trade and Business for Beginners. Now start booming and make the world your business!
Also, if you would like to learn more about international trade, here is a link to our international trade for beginners guide. You can also watch videos on my YouTube channel.
Now I would like to hear your thoughts:
What’s your first takeaway lesson from this article?
Or maybe you have a question about the topic.
Either way, leave a comment below right now.