FOREIGN TRADE

Technical Definition

Foreign trade is the purchase or sale of goods and services that takes place outside the
geographical borders of a country. That is, the parties interested in trading products are
located in different countries or regions.

Foreign trade is generally subject to various regulations on both product control and taxation.
The main objective of foreign trade is to satisfy consumer demand by taking advantage of the
comparative advantages that each country has. The concept that encompasses the foreign
trade of all countries is that of international trade.

It is important to mention that the development of foreign trade occurs thanks to the
existence of trade liberalization, in addition to the elimination of prohibitions and tariff
barriers. In turn, customs and freight policy, as well as foreign trade taxes, must be rational
and prudent. You should try to encourage competition for the good or service abroad and
allow the country to receive other different currencies. All this, in order to be able to import
goods or services without any type of protectionist policy.

Characteristics of foreign trade

Foreign trade has the following basic characteristics:

 By definition, it is a trade outside the borders of the country, which can trade with one
or more nations.
 The countries that trade have open economies or at least have foreign trade
agreements with a particular country.
 It is usually subject to special regulations.
 Countries interested in exchanging goods and services with others usually sign trade
agreements or conventions that seek to facilitate exchange processes.
 The entry or exit of products will generate a flow of foreign currency.
 Exchange rate fluctuations can affect foreign trade flows between countries that have
different currencies.
 Usually there is a public body in charge of controlling the entry and exit of goods from
a country.

Advantages and disadvantages of foreign trade

One of the greatest advantages of foreign trade is the possibility that people and companies
can access more varied and cheaper goods and services. Indeed, foreign trade drives
competition between different countries that have a different availability of resources. This
allows people to access goods that are not produced locally or the same local goods, but at a
reduced price.

Foreign trade also makes it possible to complement domestic production when it is insufficient
to satisfy local demand. In addition, foreign trade drives efficiency as it allows countries to take
advantage of their comparative advantages, both in resources and in technology or location.

However, foreign trade can be detrimental to less efficient local companies. Indeed, increased
competition from companies from other countries can put pressure on local companies that
are not capable of adapting and attracting customer preferences to leave. However, this is not
harmful to consumers or to society in general. In fact, this is the objective of the free market,
to promote competition so that only the most efficient can stay and satisfy consumer demand
in the best possible way.

Foreign trade models

In economics, there are various models that try to explain the logic of foreign trade flows over
a period of time, trying to identify what the determining factors are and how their variation
affects trade flows. Here we briefly present four of the best known:

 Absolute advantage of Adam Smith: According to this model, goods will be produced
and exported from the countries that have lower absolute costs of production.
 David Ricardo's relative advantage: According to Ricardo's model, what is relevant to
determine what a country will produce and trade is not the absolute costs, but the
relative costs.
 Heckscher-Ohlin Model: The proposal of this model is that countries will focus their
production on goods that are more intensive in the production factor that is more
abundant in the country.
 Singer-Prebish model: According to this model, foreign trade generates a real
exchange relationship between developed and undeveloped countries that is
detrimental to the latter.

Forms of foreign trade

The three basic forms of foreign trade are as follows:

 Export: They are the set of goods and services sold by a country in foreign territory.
 Import: They are the set of goods and services purchased by a country in foreign
territory for use in national territory.
 Transit trade: Transit trade is considered to be economic services in which the
individual executing the operation does not have a registered office in either the
exporting or importing country, but is located in a third country.

Merchandise distribution channels

In addition, the merchandise distribution channels in foreign trade are classified as follows:

 Direct: Distribution is carried out directly between the producer and the buyer,
without the intervention of any national intermediary.
 Indirect: They are carried out through special companies dedicated to foreign trade
that act as intermediaries.