Def: International trade is exchange of capital, goods, and services across international borders

or territories. It refers to exports of goods and services by a firm to a foreign-based buyer

(importer)In most countries, it represents a significant share of gross domestic product (GDP)

Global trade is the exchange of raw materials, goods and services across the
geographical borders of countries across the globe. Foreign trade got its first impetus
from the industrial revolution in the late eighteenth and early nineteenth century. Rapid
development in transportation facilities resulted in a surge in international trade in the
twentieth century. Today, international trade has taken the form of outsourcing and
multinational companies (companies that have a presence in several countries).

The History of World Trade

World trade was prevalent much before the formation of nation states. Some important
examples of ancient long distance trade are:

 The Egyptians imported spices from Arabia and the ‘Land of Punt’ (present
day Somalia).

 The Ptolemaic dynasty, which ruled in Egypt from 305 BC to 30 BC, traded with
India.

 Arabian vessels were used to transport Indian goods to Aden.

 Chinese goods made their way to India, Persia and Rome through the silk route.

From the eighteenth century, industrialization and colonization went hand in hand. The
European nations increased their political power through trade. They exploited trading
opportunities in eastern countries like India.

Present Global Trade Scenario

There was a dramatic rise in world trade volumes in the twentieth century. While in
1928, world exports amounted to US$31.7 billion, this figure had risen to
US$4,215,000.2 billion by 1994. Studies conducted by the UNCTAD in 1994 show that
trade in commercial services rose much faster than merchandise trade between 1970
and 1990.

The G-7 group, comprising of the US, France, Germany, the UK, Italy, Japan and
Canada, has always commanded a dominant position in world trade. Gradually the
significance of certain Asia Pacific nations, such as China, Singapore, India, Hong
Kong, Taiwan and Korea, has risen.

World Trade Organization

The World Trade Organization (WTO) is the most powerful body for controlling the
dynamics of global trade. It has the power to enforce its rules through sanctions and
helps in the formulation of trade agreements between various countries. It also
oversees that agreement terms are adhered to by the participating countries and
resolves disputes.

International Trade Models

The theory of international trade and its possible effects can be explained with the help
of the following models:

Absolute Advantage Theory

Country A is said to have absolute advantage over country B if it can produce

commodity C with lower cost of resources than Country B. On the other hand Country B
can have an absolute advantage over country A in the production of commodity D. In
this case the countries A and B would benefit by trade. Adam Smith put forward his
theory of absolute advantage.

Comparative Advantage Theory

According to this theory a country would produce and specialize in those commodities in
which it has comparative advantage in terms of resources. The relative factor
endowments in a country play a vital role to govern the pattern of trade.

 
Heckscher-Ohlin Model
According to this theory a country will export that good which utilizes its abundant its
factor of production more intensively. Conversely, the country will import goods that
utilize factors of production that re locally less abundant in nature. Hence we see that
variation in the factor endowments play a key role in the pattern of international trade in
the case of the Heckscher-Ohlin Model.
On testing this theory empirically Wasily Leotieff found that this theory might not hold
true always. For instance United States was found to export commodities that were
labor intensive although it was a capital abundant country itself. This phenomenon was
termed as the Leontief Paradox.

Specific Factors Model

This model assumes labor to be mobile but capital fixed in the short run. According to
this model if the price of a commodity increases then the producer of that used the
specific factor to produce the good wouldprofit. The model is most suited for particular
types of industries.

Gravity Model

According to this model the distance between the countries would influence the pattern
of trade. Econometric findings have also supported this assumption.

Importance of International Trade

The buying and selling of goods and services across national borders is known as
international trade. International trade is the backbone of our modern, commercial world, as
producers in various nations try to profit from an expanded market, rather than be limited to
selling within their own borders. There are many reasons that trade across national borders
occurs, including lower production costs in one region versus another, specialized industries,
lack or surplus of natural resources and consumer tastes.

One of the most controversial components of international trade today is the lower
production costs of “developing” nations.There is currently a great deal of concern over
jobs being taken away from the United States, member countries of the European Union and
other “developed” nations as countries such as China, Korea, India, Indonesia and others
produce goods and services at much lower costs.  Both the United States and the European
Union have imposed severe restrictions on imports from Asian nations to try to stem this tide. 
Clearly, a company that can pay its workers the equivalent of dollars a day, as compared to
dollars an hour, has a distinct selling advantage.  Nevertheless, American and European
consumers are only too happy to lower their costs of living by taking advantage of cheaper,
imported goods.
Even though many consumers prefer to buy less expensive goods, some
international trade is fostered by a specialized industry that has developed due to
national talent and/or tradition.  Swiss watches, for example, will never be price-
competitive with mass produced watches from Asia. Regardless, there is a strong market
among certain consumer groups for the quality, endurance and even “snob appeal” that owning
a Rolex, Patek-Philippe or Audemars Piguet offers.  German cutlery, English bone China,
Scottish wool, fine French silks such as Hermes and other such products always find their way
onto the international trade scene because consumers in many parts of the world are willing to
foster the importation of these goods to satisfy their concept that certain countries are the best
at making certain goods.

One of the biggest components of international trade, both in terms of volume and
value of goods is oil.  Total net oil imports in 2005 are over 26 million barrels per day (U.S.
Energy Information Administration figures) (Note: Imports include crude oil, natural gas liquids,
and refined products.) At a recent average of $50 per barrel, that translates to $1billion, three
hundred million, PER DAY. The natural resources of a handful of nations, most notably the
nations of OPEC, the Organization of Petroleum Exporting Countries, are swept onto the
international trade scene in staggering numbers each day, and consumer nations continue to
absorb this flow. Other natural resources contribute to the movement of international trade, but
none to the extent of the oil trade. Diamonds from Africa, both for industrial and jewelry use,
wheat and other agricultural products from the United States and Australia, coal and steel from
Canada and Russia, all flow across borders from these nations that have the natural resources
to the nations that lack them.

Despite complaints about trade imbalances, effects on domestic economies, currency

upheavals, and loss of jobs, the reality of goods and services continually crossing borders will
not go away. International trade will continue to be the engine that runs most nations.