37.6.3: International Trade

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has existed throughout history (for example, Uttarapatha, Silk Road, Amber Road, and salt roads), its economic, social, and political importance has been on the rise in recent centuries. Trading globally gives consumers and countries the opportunity to be exposed to new markets and products. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting, and transportation. A product sold to the global market is an export, and a product bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.

Industrialization, advanced technology, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is in principle not different from domestic trade, as the motivation and behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border. The main difference is that international trade is typically more costly than domestic trade, since a border imposes tariffs, time costs due to border delays, and costs associated with country differences such as language, the legal system, or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus, international trade is mostly restricted to goods and services, and only to a lesser extent to capital, labor, or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods produced with Chinese labor.

Volume of world merchandise exports: Monthly data sourced from Bureau for Economic Policy Analysis, January 2000 to March 2012. 

Supply Chains

The global supply chain consists of complex interconnected networks that allow companies to produce, handle, and distribute goods and services to the public worldwide. A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer. Corporations manage supply chains to take advantage of cheaper costs of production. As the world has become more interconnected, resources, labor, and processes along the chain may occur in various locations, reaching an end point separate from all of these.

E-commerce is the act of buying or selling online. Electronic commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. Modern electronic commerce typically uses the World Wide Web for at least one part of the transaction’s life cycle, although it may also use other technologies such as email. E-commerce has become an important tool for businesses of all sizes worldwide, not only to sell to customers, but also to engage with them.

Offshore Outsourcing

Offshore outsourcing is the practice of hiring an external organization to perform some business functions (“outsourcing”) in a country other than the one where the products or services are actually developed or manufactured (“offshore”). It can be contrasted with offshoring, in which a company moves itself entirely to another country or functions are performed in a foreign country by a foreign subsidiary. The widespread use and availability of the Internet has enabled individuals and small businesses to contract freelancers from all over the world to get projects done at a lower cost. Crowd-sourcing systems such as Mechanical Turk and CrowdFlower have added the element of scalability, allowing businesses to outsource information tasks across the Internet to thousands of workers. Opponents point out that the practice of sending work overseas by countries with higher wages reduces their own domestic employment and domestic investment. Many customer service jobs as well as jobs in the information technology sectors (data processing, computer programming, and technical support) in countries such as the United States and the United Kingdom have been or will potentially be affected.

There are different views on the impact of offshore outsourcing, encapsulated in the debates over protectionism versus free trade. Some see offshore outsourcing as a potential threat to the domestic job market in the developed world and ask for their home governments to enact protective measures or at least to scrutinize existing trade practices. Others, particularly the countries who receive work due to offshore outsourcing, see it as an opportunity. Free-trade advocates suggest economies as a whole will obtain a net benefit from labor offshoring, but it is unclear if those whose jobs are displaced receive a net benefit.

Attributions

• International Trade
  • “Economic globalization.” https://en.wikipedia.org/wiki/Economic_globalization. Wikipedia CC BY-SA 3.0.
  • “Globalization: Movement of goods and services.” https://en.wikipedia.org/wiki/Globalization#Movement_of_goods_and_services. Wikipedia CC BY-SA 3.0.
  • “International trade.” https://en.wikipedia.org/wiki/International_trade. Wikipedia CC BY-SA 3.0.
  • “Offshore outsourcing.” https://en.wikipedia.org/wiki/Offshore_outsourcing. Wikipedia CC BY-SA 3.0.
  • “E-commerce.” https://en.wikipedia.org/wiki/E-commerce. Wikipedia CC BY-SA 3.0.
  • “Volume_of_world_merchandise_exports.png.” https://commons.wikimedia.org/wiki/File:Volume_of_world_merchandise_exports.png. Wikimedia Commons CC BY-SA 3.0.