Last updated on February 17th, 2022
What is trade?
A trade occurs when two parties take part in buying or selling goods or services. The mechanism that allows trade to occur is called a market. Trading occurs when a country exploits their abundance of resources by exchanging its surplus for a resource that another country can provide.
Trade can be traced back to over 9000 years. When Egyptian settlers came to Egypt, they quickly realised they did not have to be totally self-sufficient to produce everything they needed to live and survive by themselves. An Egyptian farmer who reared cows could trade his meat for grain that another farmer produced. This idea expanded beyond local markets and now international trade between countries is key in the global economy and is the epicentre of economic growth and development.
Why is trade important?
Trade is essential for keeping a competitive global economy and lowers the prices of goods internationally as it spurs innovation and encourages markets to become specialised.
The ability to trade also allows access to goods and services that might be of higher quality and lower cost than its domestic alternative. In some cases, there may be no domestic alternative, and trade would then provide a resource that would otherwise be unattainable.
The impact of this is the ability for a country to develop in areas it would not have been able to and focus on developing areas it does have the ability to. An example of this would be Brazil providing its $26.66bn abundance of Ore in exchange for $11.37bn worth of cutting edge computer parts from China. The best of both worlds combine to their benefit, and global development is higher than it would be if it wasn’t for international trade.
How does it work?
Trade is essentially the act of buying, selling or exchanging goods between two or more parties. To guarantee a constant cycle of global trade, countries will enter trade agreements with other countries. Trade agreements allow countries to boost their economy and bring in a surplus of resources that are not locally available in abundance or at all. Trade is carried out by local exporters that will often organise the transport of goods either via land, water or air. Continental trade is usually carried out by land, which is the cheapest. Exporters will have to carry out continental/ international trade via boat or plane; boats being the cheaper alternative.
What is the role of major trading institutions?
The World Trade Organization is the only organisation that helps importers and exporters carry out their trades by laying down clear, specific international rules and coming up with terms that trading countries then agree to and implement.
The WTO’s aim is to ease the barriers that prevent countries from trading in a productive, sufficient way. This is done by creating agreements that make up the basis of the WTO’s multilateral trading system and allow for conflict resolution, as they are legal contracts that provide transparency, predictability, and guarantees trade rights. There is also a structured dispute settlement process. Conflict is resolved by understanding the original agreements that were put in place and ensuring that the policies are being followed correctly. This helps in preventing conflict then becoming political.
What is a trade deficit?
In some cases, there can be an imbalance in what a country spends on importing goods and what they make exporting goods. When they spend more on imports than how much they make with their exports, this can lead to unemployment, deflation, and governmental financial losses.