What is International Trade?

International trade is the set of commercial operations carried out between countries and which are governed by rules established in international agreements. The concept can refer to both the circulation of goods and services and the movement of capital.

International trade has existed since the dawn of civilization. An example that we can cite is the Silk Road. In recent decades, its importance has grown with the advancement of transport, communications and industry, which is one of the characteristics of globalization.

How important is international trade?

The importance of international trade for a country’s economy is due to several factors. Among them is the guarantee of the sale of that country’s production surplus, while allowing its consumer market to have access to goods not available locally.

In addition, international trade dilutes the risks of activities, since, with the diversification of markets, companies can continue to market their products even if there is an internal economic crisis in the country on which they are based.

The best way to view the performance of a country’s international trade is through its trade balance. This indicator records the imports and exports of goods and services. If your balance is positive, it means that the country is exporting more than importing. If it is negative, the value of imports exceeds that of exports.

Difference between foreign trade and international trade

Although similar, the concept of international trade should not be confused with that of foreign trade. The difference between the two is in the rules that regulate them.

International trade follows bilateral agreements or rules negotiated in international bodies, such as the World Trade Organization (WTO) and regional blocs, such as Mercosur and the European Union.

Foreign trade has the perspective of a specific country in relation to the others. For this reason, unlike international trade, foreign trade is regulated by the country’s internal legislation, for example, by its customs legislation.

The purpose of the internal rules is to ensure the country’s interests in its trade relations. This, however, should preferably be done within the limits of international law.

The evolution of international trade

Theories that explain international trade can be divided into two major groups.

The first group focuses on the idea of comparative advantages. This model understands that international trade is encouraged by the differences in the availability of factors of production (land, labor, capital and technology) between countries and is mainly associated with economies before the First World War.

At that time, international trade took place, mainly, between territories with different characteristics. For example, Great Britain exported manufactured products, since it was abundant in capital, but it imported raw materials from countries that had more access to the factors of production that were scarce, such as land.

This group of explanations for international trade fits the classic theory of international trade, which had the contribution of authors such as Adam Smith and David Ricardo, and the neoclassical model, represented by economists Eli Heckscher, Bertil Ohlin and Paul A. Samuelson.

The post-war

The great world wars, economic crises and protectionist measures stopped international trade at the beginning of the 20th century. When the exchange of goods and services grew again after the end of World War II, liberalization agreements in the developed world changed their characteristics. These changes started to foster theories that explain international trade based on the advantages of specialization and scale production.

The consumer demands differentiated products. In order to satisfy this desire, companies needed to produce a wider range of goods. If they were focused on domestic trade, companies would have to reduce the quantity offered for each product. By expanding their sales to other countries, they were able to achieve production at scale, reducing their cost.

In this context, international trade started to develop with the exchange of similar products between countries with similar characteristics. For example, the United States sold Ford cars to Germany and imported Volkswagen cars from it.

Recent scenario

From the 1980s, comparative advantages gained strength again with the liberalization of trade in developing countries. These countries, such as China and India, have come to stand out in the export of labor-intensive products, including manufactured goods. Rich countries, on the other hand, are more advantageous in exports that depend on qualified labor.