Commerce | International trade

🌍 International Trade: Connecting the Commercial World 🤝

Introduction: Why Does My Phone Come from Halfway Across the Globe?

Welcome to the exciting world of International Trade! This chapter sits right at the heart of "Commercial Operations" because trade is the engine that drives business between nations.

Have you ever stopped to think about where your favourite pair of trainers, your phone, or the coffee you drink comes from? Chances are, they were produced in another country. International trade makes this possible.

In these notes, we will break down why countries trade, the rules they use, the barriers they face, and, importantly, how businesses actually get paid when selling goods overseas. Don't worry if some terms seem tricky at first; we’ll use simple examples to make everything clear!

SECTION 1: The Foundations of International Trade

1.1 Why Nations Trade: The Logic of Specialisation

International trade is essentially the exchange of goods and services across national borders. Countries trade for two main reasons:

Reason 1: Specialisation and Efficiency

No country can produce everything it needs as efficiently as every other country. Countries tend to focus on producing the goods and services where they have an advantage—meaning they can produce them at a lower cost or a higher quality than others.

• The Concept of Specialisation: A country focuses its resources (land, labour, capital) on what it does best. For example, Country A might be great at making high-tech software, while Country B is excellent at growing tropical fruit.
• Analogy (The Group Project): Think about a group project. You probably divide the work based on who is best at research, who is best at design, and who is best at presenting. Countries do the same thing! By specialising, everyone benefits from better overall results.
• This leads to Absolute Advantage, where one country can simply produce more of a good than another country using the same amount of resources.

Reason 2: Uneven Distribution of Resources

Resources like oil, minerals, climate, and skilled labour are not spread evenly across the planet.

• Countries with abundant oil (like Saudi Arabia) trade it with countries that have very little.
• Countries with warm climates trade fruit and coffee with countries that are too cold to grow them.
• This ensures that citizens of all countries can access a wider variety of goods and resources, improving their standard of living.

SECTION 2: Imports, Exports, and the Balance of Payments

2.1 Defining Imports and Exports

These two terms are fundamental to commerce:

• Imports (In): Goods or services purchased from foreign countries and brought INTO the home country. (e.g., A UK company buying cars manufactured in Germany.)
• Exports (Exit): Goods or services sold to foreign countries and sent OUT OF the home country. (e.g., A US company selling software licences to a Japanese firm.)

2.2 The Balance of Payments (BOP)

The Balance of Payments (BOP) is essentially the country’s comprehensive record of all economic transactions between the residents of that country and the rest of the world over a period of time (usually one year).

Analogy: Think of the BOP as the national bank statement or cheque book. It tracks all money flowing in and all money flowing out.

Components of the Balance of Payments

The most important part for Commerce students is the Current Account, which tracks trade in goods and services:

1. Visible Trade (Trade in Goods): Physical, tangible items that can be seen and touched.
   • Money earned from exporting goods (E) comes in (+)
   • Money spent on importing goods (I) goes out (-)
2. Invisible Trade (Trade in Services): Non-physical services.
   • Examples: Tourism, banking, insurance, transportation, and education fees.

Balance Outcomes

When we compare total earnings (exports) with total spending (imports), we find the balance:

• Trade Surplus: When the value of Exports (E) is greater than the value of Imports (I). Money is flowing into the country. (Good!)
• Trade Deficit: When the value of Imports (I) is greater than the value of Exports (E). Money is flowing out of the country. (Can cause problems if it lasts too long.)

SECTION 3: Trade Barriers and Protectionism

Ideally, trade would flow freely between nations (Free Trade). However, governments often impose restrictions called Trade Barriers to protect their own industries. This policy is known as Protectionism.

3.1 Arguments for Protectionism

Governments use barriers primarily to achieve the following goals:

• Protecting Infant Industries: Shielding new, developing domestic industries from fierce international competition until they are strong enough to compete globally.
• Protecting Domestic Jobs: Limiting imports encourages consumers to buy local, saving jobs in struggling sectors.
• National Security: Ensuring a country remains self-sufficient in essential industries (like food, defence, or energy).
• Preventing Dumping: Stopping foreign firms from selling goods in the home market below their cost price, which would destroy local firms.

3.2 The Key Trade Barriers (The Tools of Protectionism)

These are the main methods governments use to restrict trade:

1. Tariffs (Import Duties)

   A Tariff is a tax placed on imported goods. This increases the cost of the imported item, making local, domestically produced goods relatively cheaper and more attractive.

   Analogy: A Tariff is like a toll road for foreign products—they have to pay extra to enter the country.
2. Quotas

   A Quota is a physical limit placed on the quantity (number or volume) of a specific good that can be imported over a certain period.

   Example: The government might only allow 50,000 foreign cars of a specific model to be imported per year. This protects local car manufacturers.
3. Subsidies

   A Subsidy is a direct payment or financial aid provided by the government to local producers. This lowers the local firm's cost of production, allowing them to sell their goods at a lower price than foreign competitors (without needing tariffs).

4. Administrative Barriers

   These are bureaucratic hurdles designed to slow down or discourage imports. This includes complex customs procedures, excessive paperwork, or highly specific safety/health standards that foreign goods often fail to meet.

SECTION 4: Commercial Operations – Financing International Trade

When trading across borders, there is a risk because the buyer and seller don't know each other well, and they are using different legal systems and currencies. How does the exporter know they will get paid, and how does the importer know they will receive the goods?

Commercial operations rely on trustworthy payment methods involving banks to reduce this risk.

4.1 Key Methods of Payment

1. Telegraphic Transfer (TT) / Wire Transfer

This is the simplest and fastest method. Money is transferred directly from the buyer’s bank account to the seller’s bank account electronically.

• Advantages: Quick, low fees (for simple transactions).
• Disadvantage: High risk for the buyer or seller if they don't trust the other party, as payment is often required upfront or immediately upon shipment.

2. Bill of Exchange (BOE)

A Bill of Exchange is a written order, signed by the seller (drawer), instructing the buyer (drawee) to pay a fixed sum of money to the seller on a specified future date or on demand.

• It acts like a legally binding IOU (I Owe You) for international trade.
• The seller can sometimes sell the BOE to a bank immediately for slightly less than face value, getting cash early—this is called discounting.

3. Letter of Credit (L/C) – The Safest Method

A Letter of Credit (L/C) is a formal guarantee issued by the buyer’s bank to the seller. The bank guarantees that the seller will be paid, provided they meet all the exact conditions (like shipping the correct goods and providing the right documents).

The L/C provides security to the seller, as they know the bank, not just the foreign buyer, is promising payment.

Step-by-Step L/C Process:

1. The Importer (Buyer) requests their bank (the Issuing Bank) to open a Letter of Credit in favour of the exporter.
2. The Issuing Bank sends the L/C details to the Exporter's bank (the Advising Bank).
3. The Exporter (Seller) ships the goods and collects the necessary documents (e.g., Bill of Lading, insurance certificates).
4. The Exporter presents these documents to their Advising Bank.
5. If the documents are perfect (this is crucial!), the Advising Bank pays the Exporter.
6. The Advising Bank forwards the documents to the Issuing Bank, which then releases the documents to the Importer so they can collect the goods.

Encouragement: The Letter of Credit process involves many steps, but just remember this: the bank acts as the trusted, legal middleman to remove the risk from the buyer and seller.

4.2 Currency Considerations

When trading internationally, prices must be set in an agreed-upon currency. A UK company selling to a US company might invoice in Pounds Sterling (£) or US Dollars ($).

This introduces Exchange Rate Risk—the risk that the value of one currency changes relative to another before payment is made. Businesses often use banks to arrange forward contracts to lock in an exchange rate, reducing this risk.

Chapter Summary: Key Takeaways

• Countries trade primarily due to specialisation and the uneven distribution of resources.
• The Balance of Payments (BOP) records all money flowing in (Exports) and out (Imports) of a country.
• Protectionism uses barriers (Tariffs, Quotas, Subsidies) to protect domestic industries.
• The safest payment method for high-value international transactions is the Letter of Credit (L/C), as it involves bank guarantees.

Keep practicing those definitions and the functions of the trade barriers. You’ve got this!