Trade — is an exchange of goods and services between various actors (individuals, organizations, companies, states). The trade occurs when both parties consider it mutually profitable. Profit is the main goal of the trade. The trade of resources, technologies, and knowledge is the base of the modern economy. All developed countries aimed to create the facilities for a stable market without trade barriers.
How Trade Works
The trade is a process of selling and buying various things. The market is regulated by the law of supply and demand. According to this law, if the demand for a certain commodity is high, the supply for it will rise too, and vice versa. Sellers and buyers search for the most profitable options until they find them. The final price is established at the equilibrium point between supply and demand.
Currently, most processes in the trade sphere are related to the global market. International trade is regulated by export and import. Export is the selling of goods and services in other states. In contrast, import is the entry of goods and services. The seller who exports goods abroad is called the exporter, while the buyer of imported goods is called the importer.
To participate in international trade the government should support foreign direct investment and a favorable investment climate. Foreign investors bring money and technologies to the country. As a result, the number of goods, services, and workplaces increases.
However, the government should monitor the balance between export and import to avoid a trade deficit. This is a situation when the export in the country exceeds import. To escape the trade deficit the authorities should monitor the balance of trade.
Benefits of Trade
The involvement in the global market and possibility to provide competitively viable goods is necessary for a stable economy. The development of the internet and new technologies made the trade more convenient and fast. The more countries are integrated into global trade, the more influence they have.
Here are the main benefits of international trade:
- Presence on the global market increases revenue through access to new customers. If the clients in their own country don’t always have enough to buy the goods, the company can receive income from the sales on the international market.
- It decreases competition in the national market in the situation of oversupply.
- The business doesn’t depend on the situation in the national economy. If the country is in crisis, and the consumers don’t have enough money, the business can survive due to the customers from other countries.
- The business can benefit from the currency exchange. The final cost of goods may increase when the sum is converted to the national currency. That’s why many companies benefit from working with the foreign clients.
- The company may participate in state programs for foreign businesses and access additional financing.
- If there is a market surplus, the company can sell excessive amounts of goods in other countries.
- The company may gain a good reputation among national and international customers. In the future, such a reputation will help to find new clients.
Problems of Trade
Sometimes the development of the trade can be problematic. It gives new opportunities for foreign business, however, creates additional concurrence for national business. There are two points of view concerning the access of foreign business to the national market — free trade and protectionism.
The adepts of free trade believe that the absence of trade barriers furthers the development of new technologies and encourages investment. On the other side, the adepts of protectionism believe that the authorities should protect the national goods to save the workforce and avoid unemployment. They offer the government to create trade barriers to protect the national goods and workforce. The trade barrier is a restriction of the free exchange of goods by entering various regulations.
Types of Trade Barriers:
- Tariff — a tax that increases the price of exported goods. The higher price for an export good should push the customers away from it.
- Import quota — a limitation imposed on a certain good. With the quotas, the exporter can enter only a predefined number of goods.
- Export subsidy — a financial benefit provided to the exporter by the state to expand the export of goods abroad. As a result of such subsidies, exporters can sell goods on the foreign market at a lower price than on the domestic one.
- Voluntary export restraint— is a trade limitation concerning the number of goods that an exporting country is allowed to bring to another country. The limit is set by the exporting country.
Both these approaches have their benefits and disadvantages. Protectionism may lead to the lower quality of the national goods. Free trade can lead to unemployment. The solution is free trade among a certain group of countries but with conservation of minimum standards. Such an economic model is realized in the European Union.