International trade allows countries to exchange goods and services with money as a medium of exchange. The benefits of international trade have been the main drivers of growth in recent decades.
Countries with strong international trade are prosperous and have the power to control the global economy. World trade can become one of the most important factors in reducing poverty.
Types of international trade
There are three types of international trade: export trade, import trade and commercial warehouse. The warehouse trade is a combination of export and import trade and is also known as re-export. This means importing goods from one country and exporting them to another country for added value.
Reasons for international trade
Countries turn to international trade when there are insufficient resources or capacities to meet domestic demand. By importing the necessary goods, a country can thus use its national resources to produce what it produces better. Then the country can export the surplus to the international market. A country mainly imports goods and services for the following reasons:
If foreign companies can produce or provide goods and services at a lower cost, it may be advantageous to trade abroad.
When companies can offer high quality goods and services abroad. For example, Scotch whiskey from Scotland is considered superior.
If it is impossible to manufacture this product in the domestic market, an example is a special type of fruit or minerals. Country like Japan has no natural oil reserves and imports all of its oil.
If the demand for a product or service in a country exceeds national production, it is imported.
The importance of international trade
More choice of goods for consumption:
International trade introduces different varieties of a particular product from different destinations. This offers consumers a wider range of opportunities to not only improve their quality of life, but to grow the country as a whole.
Promotes production efficiency:
International trade promotes production efficiency as countries use better production methods to cut costs and remain competitive. Countries that can produce a product at lower cost can gain a larger market share.
Creation of more jobs:
With the country’s growing commodity market through trade, more jobs could be created. International trade helps create more jobs by creating new industries to meet the needs of different countries. This will help countries reduce their unemployment rate.
Reduces trade fluctuations:
By expanding the market with large inventories and high demand, international trade reduces trade volatility. Commodity prices tend to remain more stable.
Use of excess products:
Through international trade, various countries can sell their surplus products to other countries and earn foreign exchange.
International trade allows a country to consume products that cannot be produced domestically or whose production can be very expensive. This makes the import from other countries cheaper by foreign trade.
Promotes peace and goodwill:
International trade promotes peace, goodwill and mutual understanding between nations. The economic interdependence of the countries often leads to close cultural relations and thus avoids a war between them.