International Trade

The history of trade is largely the history of civilization. First it was what we call barter, a simple exchange of goods. Goods like cloth and glass beads were taken to distant places and exchanged for things like oriental spices. Sometimes this was a dangerous and risky business.

International trade has now developed into an intricate mechanism of transactions. Today trade is not confined to visible exports and imports of goods but also includes invisible items like services, transportation, insurance, expenditure by tourists, etc.

Countries usually specialize in certain products and commercial activities. This specialization depends on such factors as differences in climate, natural resources, labour force skills and technology. These special conditions give one country an advantage over others in producing certain goods or services.

A country has a comparative advantage in a certain product if it is produced more efficiently and at lower cost. Nations usually specialize in those goods and services in which they have the greatest comparative advantage and exchange their surplus for things they need and want but do not produce themselves.

When countries engage in international trade they express their agreement to specialize in order to produce more of certain goods or services. Countries that trade can together produce more goods and services than they could in the absence of trade.

The balance of trade indicates the difference between the total value of a country's imports and exports of visible items (goods). The balance of trade is an important part of the balance payments, which also includes invisible items and capital transfers from one country to another. If the total value of the goods imported (visibles) is higher than that of the goods exported, the balance of trade is bad (adverse or unfavourable), that is to say it shows a deficit. If the reverse case is true, the balance of trade is good or favourable and it shows a surplus. Invisible items can cover the deficit of the balance of trade and as a result the country will have a favourable balance of payments.

What a country can achieve in international trade is shown by the terms of trade. The terms of trade are the rate at which a country's exports are exchanged for its imports. Terms are said to be good or favourable to a country when the prices of its exports are high in relation to the prices of its imports, and bad or unfavourable when the reverse is the case. The terms of trade become even more favourable if the demand for a country's exports increases, or if the demand for its imports decreases, for then its import prices will fall and its export prices will rise, and it will be able to receive a greater volume of imports for a given volume of exports. On a global scale imports must equal exports, since every good exported by one country must be imported by another.

The Means of Controlling Foreign Trade

The government can control foreign trade activities in different ways. It can encourage exports and control imports.

The commercial policy of a country is always closely connected with its foreign policy. This is reflected not only by the general trend of the foreign trade of the respective country but also by the various restrictions, for example establishing quotas, raising taxes, and introducing licence systems to encourage imports or promote exports.

The government can control foreign trade activities directly or indirectly. Administrative measures (for example the introduction of a strict licence system) control these activities directly, foreign exchange regulations (for example the devaluation of the local currency) have an indirect effect on foreign trade turnover. The pound sterling, for instance, was devalued against the dollar in 1949 and 1967, making the dollar more expensive to purchase in the United Kingdom and the pound less expensive in the United States. So imports to Britain were discouraged and exports encouraged.

The government can also subsidize prices, which means that it allows goods to be sold at a price lower than the market price. The aim is to prevent the decline of a company or industry. For the same purpose the government can also extend credits.

One of the most important means of controlling foreign trade activities is through the policy of customs duties.