International trade is that economic activity that refers to the exchange of goods and services between all countries of the world.
International trade involves the purchase, sale or exchange of goods and services in different currencies and forms of payment. These exchanges between different countries or different geographical areas have been increasing thanks to trade liberalization and the elimination of tariff and non-tariff barriers .
The economies that participate in international trade are known as open economies . Open economies are those regions or nations whose trade is open abroad. Which means that they buy goods and services from abroad ( imports ) and sell goods and services outside their borders ( export ).
Within open economies there are different degrees of protectionism . Those whose tariffs are smaller, are closer to free trade . On the contrary, those that impose high tariffs are known as protectionists.
The opposite of open economies, are closed economies . Closed economies do not exchange abroad and, therefore, do not participate in international trade. An example of a closed economy is autarchy. Make sure that the exchange with the outside is very small and, of course, nothing matters (it is self-sufficient).
International Trade History
Since the beginning of economic activity the human being has been interested in exchanges. More than 10,000 years ago, people already practiced bartering . They exchanged goods according to what they produced and what interested them. At the beginning, the exchanges were between members of the same town. However, as societies moved forward and mobilized, trade spread.
It went from being among the producers of the same town, to being among the individuals of the same region. From the regions spread to the regions. Little by little, trade expanded, to the point where it became international.
Already at the end of the 16th century we can find an example of this fact. The company of the East Indies, of British origin and founded in 1599, was a company that was engaged in trade with other parts of the world. It traded with goods such as cotton, dyes or spices. So much so that it came to represent half of all world trade of the time.
Later, Adam Smith developed in his work the importance of international trade. In his work The Wealth of Nations , published in 1776, indicated that one of the keys to economic development was to open up to trade with other nations.
Despite this whole process, it has not been until the final stage of the 20th century when international trade has developed more quickly and efficiently. Thanks, among other things, to the evolution in areas such as transport, finance , technology and legislation.
Benefits of international trade
International trade is considered a very important part of global economic growth. Its birth arises from the inability to produce everything that an economy needs to develop. Not all countries have all the goods, and although they have them, not all have all the goods of the best quality. Its development implies many benefits for the economy and its growth.
An example of this is found in energy. Oil is a source of energy, however, few countries produce it in sufficient quantities to supply themselves. As a fuel, oil is necessary for transport, heating or industrial production of plastics. If a country does not have enough oil, there is only one option left: buy it from abroad.
To illustrate another example, suppose a country that produces coffee. He has the means to produce the coffee his nation consumes. However, due to geographical conditions related to the climate or the quality of the land, it produces it of poor quality. And not only produces it of poor quality, but also the cost of production is higher. Undoubtedly, it will end up importing coffee from other countries that produce it cheaper and of higher quality.
To better understand the illustrated examples, as well as the benefits of international trade, we recommend reading the following two concepts:
- Comparative advantage
- Absolute advantage
International trade does not act only with goods, it also acts with services. Today, thanks to the advances in communication, we can have a financial advisor in China even if we operate from Mexico. Maybe the service is better and it costs us cheaper.
In short, international trade acts on almost all sectors of the economy. From finance and industry, to education.