importance of international business and trade essay

The importance of international trade

International trade between different countries is an important factor in raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods.

International trade has occurred since the earliest civilisations began trading, but in recent years international trade has become increasingly important with a larger share of GDP devoted to exports and imports.

World Bank stats show how world exports as a % of GDP have increased from 13% in 1970 to 30% just before the financial crisis of 2008.

In the past decade, world exports as a share of GDP have flatlined, with no rise since the peak of 2008.

Pros and cons of international trade

International trade plays an important role in improving living standards and reducing poverty levels. But, there are also concerns about the unequal distribution effects and the environmental costs of trade.

Importance of trade

1. Make use of abundant raw materials

Some countries are naturally abundant in raw materials – oil (Qatar), metals, fish (Iceland), Congo (diamonds) Butter (New Zealand). Without trade, these countries would not benefit from the natural endowments of raw materials.

A theoretical model for this was developed by Eli Heckscher and Bertil Ohlin. Known as the Heckscher–Ohlin model (H–O model) it states countries will specialise in producing and exports goods which use abundant local factor endowments. Countries will import those goods, where resources are scarce.

2. Comparative advantage

The theory of comparative advantage states that countries should specialise in those goods where they have a relatively lower opportunity cost. Even if one country can produce two goods at a lower absolute cost – doesn’t mean they should produce everything. India, with lower labour costs, may have a comparative advantage in labour-intensive production (e.g. call centres, clothing manufacture). Therefore, it would be efficient for India to export these services and goods. While an economy like the UK may have a comparative advantage in education and video game production. Trade allows countries to specialise. More details on how comparative advantage can increase economic welfare. The theory of comparative advantage has limitations, but it explains at least some aspects of international trade.

3. Greater choice for consumers

New trade theory places less emphasis on comparative advantage and relative input costs. New trade theory states that in the real world, a driving factor behind the trade is giving consumers greater choice of differentiated products. We import BMW cars from Germany, not because they are the cheapest but because of the quality and brand image. Regarding music and film, trade enables the widest choice of music and film to appeal to different tastes. When the Beatles went on tour to the US in the 1960s, it was exporting British music – relative labour costs were unimportant.

Perhaps the best example is with goods like clothing. Some clothing (e.g. value clothes from Primark – price is very important and they are likely to be imported from low-labour cost countries like Bangladesh. However, we also import fashion labels Gucci (Italy) Chanel (France). Here consumers are benefitting from choice, rather than the lowest price. Economists argue that international trade often fits the model of monopolistic competition. In this model, the important aspect is brand differentiation. For many goods, we want to buy goods with strong brands and reputations. e.g. the popularity of Coca-Cola, Nike, Addidas, McDonalds e.t.c.

4. Specialisation and economies of scale – greater efficiency

Another aspect of new trade theory is that it doesn’t really matter what countries specialise in, the important thing is to pursue specialisation and this enables companies to benefit from economies of scale which outweigh most other factors. Sometimes, countries may specialise in particular industries for no over-riding reason – it may just be a historical accident. But, that specialisation enables improved efficiency. For high value-added products, multinationals often split the production process into a global production system. For example, Apple designs their computers in the US but contract the production to Asian factories. Trade enables a product to have multiple country sources. With car production, the productive process is often even more global with engines, tyres, design and marketing all potentially coming from different countries.

5. Service sector trade

Trade tends to conjure images of physical goods import bananas, export cars. But, increasingly the service sector economy means more trade is of invisibles – services, such as insurance, IT services and banking. Even in making this website, I sometimes outsource IT services to developers in other countries. It may be for jobs as small as $50. Furthermore, I may export a revision guide for £7.49 to countries all around the world. A global economy with modern communications enables many micro trades, which wouldn’t have been as possible in a pre-internet age.

6. Global growth and economic development

International trade has been an important factor in promopting economic growth. This growth has led to a reduction in absolute poverty levels – especially in south east Asia which has seen high rates of growth since the 1980s.

Problems arising from free trade

Given the importance of free trade to an economy, it is unsurprising that people are concerned about the potential negative impacts.

• Infant industry argument . The fear is that ‘free trade’ can cause countries to specialise in primary products – goods which have volatile prices and low-income elasticity of demand. To develop, economies may need to restrict imports and diversify the economy. This isn’t an argument against trade per se, but an awareness trade may need to be ‘managed’ rather than just rely on free markets. See more at Infant Industry Argument .
• Trade can lead to cultural homogenisation . Some fear trade gives an advantage to multinational brands and this can negatively impact local produce and traditions. Supporters argue that if local products are good, they should be able to create a niche than global brands cannot.
• Displacement effects . Free trade can cause uncompetitive domestic industries to close down, leading to structural unemployment. The problem with free trade is that there are many winners, but the losers do not gain any compensation. However, free-market economists may counter that some degree of creative destruction is inevitable in an economy and we can’t turn back to a static closed economy. On the upside, if the uncompetitive firms close down, ultimately new jobs will be created in different industries.
• Environmental costs . The transportation of goods and services imposes environmental costs of pollution and carbon emissions, contributing to global warming
• Arguments for free trade
• Arguments against free trade

18 thoughts on “The importance of international trade”

i kindly request if it is possible, the analysis above to be disaggregated into regional trade agreements, like what is happening in EU, EAC, ECOWAS and NAFTA.

It stood out to me when you explained that international trade can help reduce poverty levels. I would imagine that there are certain laws and regulations that have to be followed in international trade. Following the laws and regulations would probably make international trade much more efficient.

What are five important of international trade

Comments are closed.

What Is International Business? What To Know About This Major

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Updated: Apr 29, 2024, 1:33pm

Do you dream of traveling the world and liaising with high-profile global clients? If so, you may enjoy an international business career. International business comprises any commercial activity conducted globally, including trade, investment, finance and marketing. Companies that conduct business internationally—like Walmart, Amazon, Apple and McDonald’s—operate beyond domestic borders and engage with diverse markets, cultures and regulatory environments.

As the global marketplace continues to grow, students can pursue international business majors to prepare for fulfilling, impactful careers in worldwide commerce. This guide explores the ins and outs of international business degrees, including admission requirements, common curriculums and potential career options.

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What Is an International Business Major?

International business requires a thorough understanding of fundamentals like trade regulations, cross-cultural communication and global market trends. A degree in this field helps prepare students for the complexities of international trade and business operations.

International business programs help students cultivate adaptability, cultural awareness, emotional intelligence and strong communication skills—all crucial qualities for thriving in international markets where political and regulatory challenges often arise. Students learn about diverse cultures, financial structures, legal systems, regulations and policies. These degrees may also require learners to immerse themselves in new cultures by studying abroad or learning foreign languages.

An international business degree prepares graduates to assess risk, drive innovation and lead change on a global scale. Graduates can pursue further study or launch careers with international organizations or government agencies. Examples of international business degree jobs include human resources manager, market research analyst, economist and operations manager.

Types of International Business Degrees

International business degrees at all levels delve into core principles of business and economics, exploring applications within a global marketplace. We explore each kind of international business program below.

Associate in International Business

An Associate of Arts in international business typically consists of 60 credits and requires two years of full-time study. Coursework combines general education and introductory business courses like the following:

• Introduction to international business
• Financial accounting
• Principles of marketing
• Business law
• Principles of microeconomics
• Principles of macroeconomics

Admission Requirements

Associate degree admission requirements vary by program, but usually include a high school diploma or its equivalent. Prospective students must submit an application and may have to pay an application fee. Some programs require a minimum GPA for admission, while others offer more flexible admission policies.

An associate in international business qualifies students for entry-level jobs that require a basic understanding of global business operations. Common careers for associate degree graduates include:

• Global marketing assistant
• Customs compliance specialist
• Import/export coordinator
• International sales representative
• Logistics manager

Bachelor’s in International Business

A bachelor’s degree in international business provides more rigor and depth than an associate-level program. Classes address global business principles and cross-cultural communication skills. The degree usually consists of 120 credits and demands four years of full-time study. Some programs offer concentrations so students can pursue specialized international business subfields. While every school offers its own curriculum, classes learners may encounter in a bachelor’s program include:

• Business and economic statistics
• Business law and ethics
• Accounting principles
• Business leadership
• Organizational behavior
• Information systems
• Human resource management
• Strategic management
• Supply chain management
• Financial management

Bachelor’s degree requirements vary by institution, but typically include high school transcripts (or the equivalent), an application, and an application fee. Many schools require a minimum GPA, SAT or ACT scores, and a personal essay.

A bachelor’s in international business can qualify graduates for various business management careers . Possible jobs include:

• International marketing manager
• International sales manager
• Global supply chain manager
• International business consultant
• International business development specialist
• International business financial analyst
• Public relations manager
• Human resources manager
• Investment banker or analyst

Master’s in International Business

While workers can qualify for managerial roles with just a bachelor’s degree, companies may prefer to hire candidates with advanced educational credentials. A master’s in international business builds upon previous knowledge and skills, preparing students for senior-level and executive roles. These degrees usually take one to two years of full-time study. Coursework may include:

• Global business strategy
• International marketing
• Cross-cultural management
• International trade law
• Global supply chain management
• International financial policy
• Global business ethics

Though each school maintains its own admissions criteria, many programs require a bachelor’s degree from an accredited institution with a minimum GPA, a résumé, letters of recommendation and GMAT or GRE test scores. Some programs require at least 18 months of relevant work experience, language proficiency tests and an active passport.

A Master of International Business (M.I.B.) can qualify professionals for advanced positions in multinational corporations, government agencies and international organizations. Students develop a deep understanding of global business strategy, international trade regulations, language proficiency and negotiation skills. Career options for M.I.B. graduates include:

• Foreign service officer
• Diplomatic security specialist
• International trade specialist
• Global marketing manager
• International business manager
• Investor relations specialist
• Global research director
• Information security manager
• Corporate investment banker

M.B.A. in International Business

A Master of Business Administration in international business resembles traditional M.B.A. programs but emphasizes the global aspects of business management. Programs typically take 1.5 to two years to complete and often serve professionals with two to five years of experience.

M.B.A. programs in international business cover accounting, finance, leadership and marketing fundamentals. Courses explore foreign markets, cross-cultural communication and global economics. Classes may include:

• Global marketing management
• International finance
• International trade and investment
• International business law and ethics
• Global economic environment

Entry into an M.B.A. in international business requires a bachelor’s degree from an accredited institution, often with a business-related major and minimum GPA requirement. While specific requirements vary by program, the following application components are typical.

• Two or more professional references
• Admissions essay or statement of purpose
• Official transcripts
• GMAT or GRE scores that meet minimum requirements

Graduates with an M.B.A. in international business learn to make strategic decisions that drive business growth on a global scale. This knowledge can qualify them for upper-level leadership positions. Job opportunities include:

• Global marketing director
• International trade compliance manager
• International logistics manager
• Brand and product development coordinator
• Supply chain management director
• International human resources manager

D.B.A. in International Business

A Doctor of Business Administration in international business is a terminal degree focusing on advanced research and practical applications of global business. Typically comprising 60 credits, most D.B.A. programs take three to five years of full-time study. The degree prepares graduates for senior-level roles and may require internships, capstones, or research projects. The curriculum consists of advanced courses such as:

• International business theory
• Foundations of information systems
• Contemporary issues in management
• Global economics
• Research methods

D.B.A. programs typically require applicants to hold a master’s degree in business or a related field with a minimum GPA. While requirements vary by school, they usually include:

• GMAT or GRE scores
• Two to five years of work experience in managerial or executive roles
• Academic transcripts
• Statement of purpose or letter of intent
• Letters of recommendation
• Admissions interview

After earning a D.B.A. in international business, graduates can pursue high-level executive roles in the global business landscape. Examples include:

• Chief global officer
• Global business development director
• Global operations director
• International business professor
• International management consultant
• Logistics analyst
• Organizational development manager

Ph.D. in International Business

A Doctor of Philosophy in international business focuses on the theoretical side of business. Students often participate in research with faculty members to prepare themselves for roles in academia, research, policy and the C-suite.

It usually takes three to five years of full-time study to earn a Ph.D., and students typically complete 45 to 80 credits. Most programs require a dissertation. Degrees may require students to choose a specialization area like anthropology or sociology through which they focus their research. International business Ph.D. programs may include the following courses:

• Foreign direct investment
• Theories of globalization
• Multinational marketing
• Global economic issues
• Multinational finance
• Advanced quantitative methods

A Ph.D. in international business usually requires a master’s degree in a related field like business administration. Applicants may need to demonstrate a minimum GPA. Depending on the program, applicants may also have to submit or complete the following:

• Personal essay

While most graduates with Ph.D.s in international business pursue careers in academia, some may perform senior executive roles. Job options include:

• Senior risk management consultant
• Economic researcher
• Business development manager
• University professor
• Policy analyst
• Director of international programs

Certificate in International Business

Higher education institutions offer certificate programs in international business at the graduate and undergraduate levels. Many certificate programs include academic credit for study abroad.

Undergraduate certificates in international business typically entail 15 to 24 credits, while graduate-level international business certificate programs range from about 12 to 16 credits. Some schools allow students to stack graduate certificate credits toward a further business graduate degree such as an M.B.A.

Admission requirements

Undergraduate international business certificates are typically designed to be earned in conjunction with a degree such as a bachelor’s in business administration . As such, enrollees are usually already enrolled students at their institutions.

Standalone graduate certificate programs in international business may have less rigorous admission requirements than master’s degree programs. For example, work experience and standardized test requirements are rare. Students must usually submit some or all of these materials:

• Bachelor’s degree transcripts
• Statement of purpose
• Proof of English language proficiency

Career opportunities for graduates of international business certificate programs typically mirror those for bachelor’s or master’s programs in the field, depending on the certificate level. Students can use these short programs to boost their résumés and demonstrate global business skills and knowledge to potential employers.

Frequently Asked Questions (FAQs) About the International Business Major

Is international business a good career.

International business can be a rewarding career for individuals who enjoy working in a dynamic global environment. The field offers opportunities to engage with diverse cultures, travel the world and contribute to the growth of multinational companies. Adaptable, emotionally intelligent professionals often thrive in this demanding field.

What do you study in international business?

International business students study global marketplace topics such as international trade, finance, legal and economic systems, cross-cultural management, marketing strategies and sociopolitical contexts. The degree prepares students for various roles that involve conducting business on the global stage.

What are the fees for an M.S. in international business?

According to National Center for Education Statistics data, the average annual tuition and fees for all graduate programs, including master’s-level business programs, was $11,554 at in-state public schools, $21,000 at out-of-state public schools, and $20,408 at private nonprofit institutions in the 2022-23 school year. Investigate each prospective program’s fees to understand how much a degree will cost.

What is the scope of a master’s in international business?

A master’s degree provides students with detailed knowledge of international trade, marketing, finance and management. Programs in this field equip graduates with specialized skills to navigate complex global markets.

What can I do with a master’s in international business?

A master’s in international business offers diverse career options in the global business landscape. Graduates can qualify for positions such as international marketing manager, international trade specialist and global operations manager.

What is the course duration for an M.S. in international business?

Most master’s in international business degrees take one to two years when studying full time. This timeline does not include earning a bachelor’s degree, which usually takes four years of full-time study. Some master’s programs also require applicants to hold about two years of postbaccalaureate career experience.

Is a master’s in international business better than an M.B.A.?

Whether an international business master’s is better than an M.B.A. depends on your career goals. Both degrees can help prepare you for careers in international trade, though M.B.A. programs usually offer broader education in business, which can make the degree more versatile.

What is the salary for a master’s in international business?

Salaries vary by career. For example, human resources managers —one possible career for professionals with a master’s in international business—earned a median wage of $130,000 in 2022, according to the U.S. Bureau of Labor Statistics . Other factors that impact salaries include employer, location, company size, and experience.

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Brenna Swanston is an education-focused editor and writer with a particular interest in education equity and alternative educational paths. As a newswriter in her early career, Brenna's education reporting earned national awards and state-level accolades in California and North Carolina. Since 2018, she has worked in the higher-education web content space, where she aims to help current and prospective students of all backgrounds find effective, accessible pathways to rewarding careers.

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International (Global) Trade: Definition, Benefits, and Criticisms

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• International Trade

Imports and Exports

Comparative advantage.

• Other Benefits

Free Trade vs. Protectionism

The bottom line.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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International trade is the purchase and sale of goods and services by companies in different countries. Consumer goods, raw materials, food, and machinery all are bought and sold in the international marketplace.

International trade allows countries to expand their markets and access goods and services that otherwise may not have been available domestically. As a result of international trade, the market is more competitive.

This can ultimately result in more competitive pricing and cheaper products. Some countries engage in national treatment of imported goods, treating them as equivalent to those same products produced domestically.

Key Takeaways

• International trade allows consumers and countries to be exposed to goods and services that are not available in their own countries, or that are more expensive domestically.
• The importance of international trade was recognized early on by political economists such as Adam Smith and David Ricardo.
• Critics argue that international trade can be harmful to smaller nations, putting them at a disadvantage on the world stage.

Understanding International Trade

If you can walk into a supermarket and find Costa Rican bananas, Brazilian coffee, and a bottle of South African wine, you're experiencing the impacts of international trade.

International trade was key to the rise of the global economy. In the global economy, supply and demand—and thus prices—both impact and are impacted by global events.

Political change in Asia, for example, could increase the cost of labor. This could increase the manufacturing costs for an American sneaker company that is based in Malaysia, which would then increase the price charged for a pair of sneakers that an American consumer might purchase at their local mall.

A product that is sold to the global market is called an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in the current account section of a country's balance of payments.

Different countries are endowed with different assets and natural resources, such as land, labor, capital, and technology. Global trade allows wealthy countries to use their resources more efficiently.

This also allows some countries to produce the same good more efficiently; in other words, more quickly and at a lower cost. Therefore, they may sell it more cheaply than other countries might. If a country cannot efficiently produce an item, it can obtain it by trading with another country that can. This is known as specialization .

England and Portugal have historically been used—as far back as in Adam Smith's "The Wealth of Nations" — to illustrate how two countries can mutually benefit by specializing and trading according to their own comparative advantages.

In such examples, Portugal is said to have plentiful vineyards and can make wine at a low cost, while England is able to manufacture cloth more cheaply given its pastures are full of sheep.

According to the theory of comparative advantage , each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate domestically in favor of engaging in trade.

Indeed, over time, England would likely stop producing wine, and Portugal would stop manufacturing cloth. Both countries would realize that it was to their advantage to redirect their efforts at producing what they were relatively better at domestically and, instead, to trade with each other in order to acquire the other.

According to international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization.

These two countries realized that they could produce more by focusing on those products for which they have a comparative advantage. In such a case, the Portuguese would begin to produce only wine, and the English, only cloth.

Each country could then create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country could access both products at lower costs. We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing.

Comparative advantage can contrast with absolute advantage . Absolute advantage leads to unambiguous gains from specialization and trade only in cases wherein each producer has an absolute advantage in producing some good.

If a producer lacked any absolute advantage, then they would never export anything. But we do see that countries without any clear absolute advantage do gain from trade because they have a comparative advantage.

Origins of Comparative Advantage

The theory of comparative advantage has been attributed to the English political economist  David Ricardo . Comparative advantage is discussed in Ricardo's book " On the Principles of Political Economy and Taxation," published in 1817, although it has been suggested that Ricardo's mentor, James Mill, likely originated the analysis and slipped it into Ricardo's book on the sly.

Comparative advantage, as we have shown above, famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages.

In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. Ricardo predicted that each country would eventually recognize these facts and stop attempting to make a product that was more costly to generate.

A more contemporary example of comparative advantage is China’s comparative advantage over the United States in the form of cheap labor. Throughout much of the 20th century, Chinese workers produced simple consumer goods at a much lower opportunity cost.

The comparative advantage for the U.S. is in specialized, capital-intensive labor. American workers produce sophisticated goods or investment opportunities at lower opportunity costs.

Specializing and trading along these lines benefit each country. However, it should be noted that Chinese manufacturers are now able to produce goods that span all levels of the value chain, including high-quality, higher-cost products.

The theory of comparative advantage helps to explain why protectionism has been traditionally unsuccessful. If a country removes itself from an international trade agreement, or if a government imposes tariffs, it may produce an immediate local benefit in the form of new jobs; however, this is rarely a long-term solution to a trade problem.

Eventually, that country will grow to be at a disadvantage relative to its neighbors, countries that were already better able to produce these items at a lower opportunity cost.

The U.S. international trade deficit in July 2024 was $78.8 billion, meaning imports exceeded exports.

Criticisms of Comparative Advantage

Why doesn't the world have open trading between countries? When there is free trade, why do some countries remain poor at the expense of others? There are many reasons, but the most influential is something that economists call  rent-seeking . Rent-seeking occurs when one group organizes and lobbies the government to protect its interests.

Say, for example, the producers of American shoes understand and agree with the free-trade argument but also know that cheaper foreign shoes would negatively impact their narrow interests.

Even if laborers would be most productive by switching from making shoes to making computers, nobody in the shoe industry wants to lose their job or see profits decrease in the short run.

This desire could lead the shoemakers to lobby for special tax breaks for their products or extra duties (or even outright bans) on foreign footwear.

Appeals to save American jobs and preserve a time-honored American craft abound—even though, in the long run, American laborers would be relatively less productive and American consumers relatively poorer as a result of such protectionist tactics.

Other Possible Benefits of Trading Globally 

International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity for foreign direct investment (FDI). In theory, economies can thus grow more efficiently and become competitive economic participants more easily.

For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. It raises employment levels and, theoretically, leads to growth in the gross domestic product (GDP). For the investor, FDI offers company expansion and growth, which means higher revenues.

As with all theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade between countries.

Free trade is the simpler of the two theories. This approach is also sometimes referred to as laissez-faire economics. With a laissez-faire approach, there are no restrictions on trade.

The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing must be done to protect or promote trade and growth because market forces will do this automatically.

Protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade, and they aim to guide the market accordingly.

Protectionism exists in many different forms, but the most common are tariffs , subsidies , and quotas . These strategies attempt to correct any inefficiency in the international market.

As international trade opens up the opportunity for specialization, and thus more efficient use of resources, it has the potential to maximize a country's capacity to produce and acquire goods.

Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change. Thus, as it develops, so too must its participants.

What Are the Benefits of International Trade for a Business?

The benefits of international trade for a business are a larger potential customer base, meaning more profits and revenues, possibly less competition in a foreign market that hasn't been accessed as yet, diversification, and possible benefits through foreign exchange rates.

What Creates the Need for International Trade?

International trade arises from the differences in certain areas of each nation. Typically, differences in technology, education, demand, government policies, labor laws, natural resources, wages, and financing opportunities spur international trade.

What Are Common Barriers to International Trade?

The barriers to international trade are policies that governments implement to prevent international trade and protect domestic markets. These include subsidies, tariffs, quotas, import and export licenses, and standardization.

The world economies have become more intertwined through globalization and international trade is a major part of most economies. It provides consumers with a variety of options and increases competition so that businesses must produce cost-efficient and high-quality goods, benefiting these consumers.

Nations also benefit through international trade, focusing on producing the goods they have a comparative advantage in. Though some countries limit international trade through tariffs and quotas to protect domestic businesses, international trade has been shown to benefit economies as a whole.

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A free flow of business relationships and person-to-person interaction has been the life blood of commerce for much of the last few decades, but this has been suddenly interrupted due to the Covid-19 pandemic . It is especially important in this context to take a step back and “ look over the fence ” to assess where relations currently stand. In this assessment, the importance of the cultural environment cannot be overlooked.

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Developing international business relationships in a russian context.

International Business

• Free flow of business
• Person-to-person interaction
• Covid-19 pandemic
• “Look over the fence”
• Cultural environment

1 The Fundamental Importance of International Business Relations

Every entrepreneur knows the importance of occasionally taking a bird’s eye view of one’s own business activities. In Switzerland we call this taking “a look over the fence”. We are now well into 2021. More than a year has passed since COVID-19 interrupted the free flow of people-to-people business relationships and this has happened in an entirely unexpected, unprepared, and unprecedented way. This tiny virus has initiated a tug of war: fear versus faith, apathy versus hope, greed versus fairness, selfishness versus generosity, and ignorance versus awareness. This may sound dramatic, but it accurately reflects the times we are currently living in—a time that feels extreme and critical on many levels. Let’s step back for a moment, widen our view, and examine why the free flow of international business between individuals, enterprises, and organizations is and always will be of vital importance to the human race.

The prevalence of international business has increased significantly during the last part of the twentieth century, thanks to the liberalization of trade and investment and the development of technology. Of course, there are many other international exchanges in place such as diplomatic, cultural, scientific, tourism, and international sporting events. These are essential and necessary, but they are mostly just short-term or related to small groups. Only international business can create wide-range, long-term, grassroots, people-to-people exchanges through strong networks with pragmatic development that is nonviolent, mindful, and respectful of each other’s differences and strengths.

In countries where media is very much focused on purely domestic information, some people have exaggerated ideas about themselves. They think of themselves as bigger than they really are, and only their own worldview is the right one. Only through in-person international business travel and exchange are such individuals and enterprises granted an eye-opening reality check and only then do they discover their real position and the value of their capabilities. In recent history, some governments and groups of people have begun to promote division and isolation, developing concepts that conceal their unilateralism. Such selfish actions are hostile toward the world. Greed and protectionism are hurting hundreds of thousands of small businesses and millions of individuals. As a result of this trend, we will most likely experience even more profound polarization in the next few years as the firestorm of misinformation continues to burn.

Fortunately, businesspeople of all races and beliefs, who have personally experienced other countries and have developed personal relationships, will be able to distinguish between lies and truth.

Despite the struggle conveyed above, I believe the coming years will initiate a continuous progressive curve toward a more humane world. Jointly addressing climate change, equality, and expanding political alliances is entirely possible, but this will most likely take place against a background of natural disasters, violence, and extremism. Building trust, understanding, solving problems, and achieving success together is the only way to—finally—build a better future for all mankind.

If the leading people of all nations would critically and honestly analyze themselves, everybody would have to admit that, on the whole, we have done a terrible job. How is it possible, after thousands of years of evolution and development, that we are still acting so immature and primitive, to put it nicely? There is still a huge amount of gender suppression toward women or toward groups of people who adhere to a different belief system, or have a different skin color, or carry a different country’s flag. We are still polluting our beautiful planet as if there were no tomorrow! Think about it. What could we, the inhabitants of this planet, achieve if we were to learn how to work together and create just a simple five-year plan together? What is keeping us from becoming smarter, more sustainable, and acting more responsibly?

We need an integrative, inclusive world economy that does not continue to produce more losers and victims. This is not just the idealistic wish of some dreamers; many international organizations have put this at the top of their agenda. Repeating this sentence over and over does not help, we must take action! Every entrepreneur and institution is responsible and must be asked to take a sustainable, holistic approach instead of carefree, narrow-minded, short-term thinking.

We do not need to wait for a government or a world organization to take the initiative. Many of us can start now by acting in a responsible way in domestic and, even more so, in international business projects. The good thing is that even one bold decision by a single country may create a ripple effect that spreads throughout the world. For example, new environmental regulations implemented in one country may force foreign enterprises to comply or watch their business in that market or become irrelevant. With a little bit of common-sense guidance from local lawmakers, international businesses can become the vehicles driving organic growth toward a sustainable, accountable, and comprehensive world economy.

2 Understanding of Cultural Environment is Key to Success

Now let us take a closer look at some international business projects. International business occurs in many different formats: from the movement of goods from one country to another to the licensing of products or processes, and franchising, as well as the formation and operations of sales, manufacturing, research and development, and distribution in foreign markets.

Participation in international business allows countries and their enterprises to leverage their local comparative advantage, their unique specialized expertise, and an abundance of different factors related to the production of and delivery of goods and services into the international marketplace. International business also promotes competition in domestic markets and introduces new opportunities to foreign markets. Global competition helps companies become more innovative and efficient in their use of resources. Today, global competition affects nearly every company—regardless of size. For consumers, international business introduces them to a variety of goods and services. For many, it enhances their standard of living and increases their exposure to new ideas, devices, products, services, and technologies. To ensure success in a foreign market, international businesses must understand the many factors that affect the competitive environment and effectively assess their impact.

2.1 Economic Environment

Economic environments may be vastly different from one country to the next. The economies of various countries may range from developed and emerging, to less developed. This brings a vast array of variations, which have a major effect on everything from education and infrastructure to technology and healthcare.

2.2 Political Environment

The political environment of international business refers to the relationship between government and business, as well as the political risk of a nation. Therefore, companies involved in international business must be ready to deal with different types of governments and institutions. Because international companies rely on the goodwill of governments, international businesses must consider the political structure of the country in which they intend to operate.

2.3 Competitive Environment

The competitive environment is constantly changing based on economic, political, and cultural contexts. Competition may come from a variety of sources, and the nature of competition may change from place to place. The level of technological innovation is also an important aspect of the competitive environment as firms compete for access to the newest technology. There is no common roadmap.

2.4 Cultural Environment

The cultural environment of a foreign nation remains a critical component of the international business environment, yet it is one of the most difficult to understand. The cultural environment of a foreign country is rooted in commonly shared beliefs and values, formed by elements such as language, religion, geographic location, government, history, and education. It is common for many international firms to conduct a cultural analysis of a foreign country in order to better understand these factors and how they affect international business efforts.

Over the past 40 years of opening-up and development in China, many foreign enterprises have entered the market. Some of them have succeeded and are still flourishing, while others did not and were forced to leave. Based on my observations, a key reason that companies leave is a lack of deep cultural understanding, whether of their clients, employees, their local suppliers, the legal framework, etc. From far away, it all looks very simple, but in fact, a lack of cultural understanding will affect your business sooner or later. Of course, this is not only true for China, it is true for any international operation, even for business exchanges between neighboring countries.

One example from Europe, which I experienced when I managed international sales, is about communication, specifically verbal expression. The second most spoken language in Europe is German, which is spoken in Germany, Austria, Switzerland, and Lichtenstein. So, if someone wants to open a production facility, an R&D, or logistics center there, everything may go well. But if you want to do personal sales, no single person would be able to cover the entire geographical region. The cultures of these countries are considerably different when it comes to sales and sales talk, which makes local people essential if you want to be successful.

We are living in turbulent times and doing business internationally is often a complex process, but that is fine. We all know after some rough weather, smooth sailing will ultimately return. The world needs millions of cross-border business transactions, and we can do our part by ensuring that the projects we personally conduct are sustainable, efficient, legal, honest, and beneficial for all involved.

My organization, the Swiss Chinese Chamber of Commerce in Mainland China, is ready and well equipped to support Chinese and Swiss entrepreneurs. Acting “smart and sustainable” is our goal and the principle that we promote together with institutions from the Swiss government. Every single person counts when it comes to leaving our children a better economy and a healthier planet.

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Mueller, M. (2022). The Significance of International Business. In: Wang, H., Miao, L. (eds) Transition and Opportunity. China and Globalization. Springer, Singapore. https://doi.org/10.1007/978-981-16-8603-0_1

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Introduction

Globalisation has been seen as an opportunity for international business. Indeed, it has become part and parcel of international business that influences the movement of goods and services and the nature of trade patterns. Globalisation has been associated with the expansion of international business in various regions around the world.

International business relies on globalisation to bring together different cultures, markets, political settings, economic structures, and social elements (Shoham 2011). Despite these benefits, globalisation has serious effects on international business, which outweigh its positive impacts.

Globalisation and International Business

An assessment of the effects of globalisation on international business has mainly focused on its positive impacts. As such, globalisation has been attributed to expansion and growth of the global economy. Trade between nations relies on globalisation to foster international elements of business, such as foreign direct investment. The investment opens business opportunities in various countries across the world.

It also plays an important role in removing the trade barriers, such as tariffs on imports and exports (Joshi 2009). Foreign investment provides marketing opportunities for multinational corporations. Another benefit of globalisation is that it increases consumer’s income by enabling multinational corporations to increase the wage earnings and salaries of different people employed by the firms (Daly 2001).

Globalisation also increases the investment opportunities for investors and business entrepreneurs around the world. Due to globalisation, business entities develop new products to serve new market segments in various countries across the world. Businesses also develop new products to diversify their product lines and serve more consumers in various market segments.

Development of new products has also enabled the consumers to access a wide range of goods and services. Consumers who buy goods from international markets are able to purchase their goods from more than one vendor (Meredith 2000).

Introduction of new technologies is another factor that has greatly contributed to the positive assessment of globalisation in international business. Organisations in the global arena are exposed to new technologies that are developed by different industries.

Such technologies enable organisations to improve the efficiency and effectiveness of business processes. For instance, a business organisation can use new technology to enhance the production process and ensure cost reduction for competitive advantage. The use of technology in production processes is also important in ensuring economies of scale (Sullivan, 2002).

Another positive aspect of globalisation is increased performance of local and international companies due to competition. Globalisation increases competition between firms, thereby increasing business efficiency. Companies trading in international arena develop products that are of high quality with superior features and performance.

Consequently, such initiatives play an important role in attracting more customers and enable an organisation to improve its business processes. Globalisation provides an opportunity for international companies to identify unique points of competition, which can be used in developing products that meet the needs and expectations of the consumers in the market (Daniels, Radebaugh & Sullivan 2007).

Threats of Globalisation

Many people tend to overlook the threats of globalisation international business. Globalisation has been associated with the collapse of the various domestic companies. It has also been attributed to the deterioration of business culture in various regions across the world. In other cases, globalisation has been associated with rising levels of insecurity all over the globe.

For instance, issues, such as terrorism and marine piracy, are subsequent effects of globalisation on international business. It is, therefore, cardinal to highlight the specific threats of globalisation on international business (Clark 1997). The threats outlined are as follows.

Unfair Competition

Unfair competition remains the key threat that affects international business. Many organisations have been phased out of the global market due to intense competition from various companies. Globalisation promotes unfair competition by enabling multinational companies from developed countries to take advantage of the business opportunities in the industry.

Companies from developed countries have efficient technological tools and effective business strategies, which are used to exploit the resources in the business environment. To this end, globalisation promotes the development of well-established companies at the expenses of the less developed organisations.

International companies strive to increase their market share in the emerging markets by offering high quality goods at low prices, hence killing domestic businesses (Daly 2001).

Globalisation also promotes unfair competition through trade policies established by the government of a given country. For instance, in most countries across the word, the government tends to promote the development of local companies. The government provides subsidies and trade incentives to foster the development of domestic companies. Incentives may include tax exemptions and reduced energy cost.

International companies in such countries may be forced to pay higher taxes as compared to the domestic organisations in the same country. Trade policies on imports and exports also encourage unfair competition in international trade. Governments and trade entities in different regions around the world have developed trade policies, which are meant to promote the development of domestic trade.

For instance, some governments facilitate the promotion of export trade by reducing the trade barriers and tariffs on exports. Such initiatives hinder the free movement of goods in the global market. On the other hand, a country that promotes the trade on imports may promote the development of international companies at the expense of the local based organisation.

A country that has adopted such an approach tends to foster mobility of international factors of production, such as labour and capital. Economic development in such countries may be slow due to high levels of unemployment (Sullivan, 2002).

Effects of Free Trade on Emerging Businesses

Businesses emerging in developing countries are at greater risk of failing due to the development of free trade, which is fostered by globalisation. Globalisation has exposed emerging businesses in developing countries to unfair trade practices and policies that are promoted by free trade.

For example, tariff protection policies instituted by developed countries tend to open business opportunities for multinational businesses in developed countries. Most developing countries are mainly importers of the goods that are manufactured by the companies in the developed countries.

On the other hand, the companies in developing countries focus on the production of agricultural and food products that are less competitive compared to the machines and electronics that are manufactured in the developed states.

Moreover, the goods manufactured by the developed countries are not exposed to regulative measures compared to the goods manufactured in those regions. Agricultural goods are regarded as very sensitive and attract low prices as compared to machines and electronics (Daniels, Radebaugh & Sullivan 2007).

Interference with Cultural Diversity

Despite the unanimous positive assessment that globalisation promotes cultural diversity, many people tend to overlook the threats that globalisation imposes on cultural diversity. Globalisation has been associated with dominance of strong cultures over the other. Trade cultures have been found to be influential in determining the development and growth of international trade around the world.

For instance, there is belief that globalisation has greatly contributed to the spread of the western culture across the world. The western culture has been discovered to determine the specific elements of business, such as consumer behaviour and consumption patterns.

The dominance of the western culture has led to the decline of business opportunities. As such, international marketers have not been able to identify diverse elements of various cultures, which can be used to develop different products to serve diverse consumer needs (Clark 1997).

Disparities in consumer characteristics are very important in diversification and development of new markets. The differences between the consumers transcend from their cultural backgrounds.

The western culture has dominated other cultures around the world, hence interfering with the development of new business opportunities. For instance, in the contemporary society, most consumers tend to imitate the western culture on different aspects, such as fashion, lifestyle, and social groupings (Satya 1997).

Global cultural unity among the consumers around the world interferes with the cultural heritage of various people. Cultural heritage determines how various people correspond to issues, such as marketing campaigns and product’s features. Globalisation also increases the gap between the rich and the poor.

For instance, when a multinational corporation shifts its operations from a country where the cost of labour is high to a region where the cost of labour is low, the organisation increases the income in the latter state.

At the same, the company increases the gap between the rich and the poor in the former country due to increased rate of unemployment and income. The disparities between the rich and the poor in the economy also lead to purchasing power, hence affecting the pace of growth.

Environmental Effects

Another threat of globalisation on international business is environmental effects. Globalisation is one of the key factors that have been associated with degradation of the natural environment around the world. The emergence and spread of new technologies around the world have led to increased utilisation of non-renewable resources.

Manufacturing companies around the world use natural resources that are extracted from the environment. The exploitation of such resources leads to environmental pollution and global warming. In other cases, multinational companies tend to take advantage of the loopholes in environmental laws.

For instance, business organisations from the developed countries tend to take advantage of the less strict environmental policies in the developing countries. Effects of environmental degradation such as global warming and the depletion of natural resources have been on the verge of increase due to globalisation.

Companies from the transportation industry, construction sector, mining industry, and the energy sector have been forced to increase their production activities due to increased demand in the global market.

The results of such activities lead to increased environmental costs to the businesses, members of the society, and the government. In this regard, globalisation not only interferes with the sustainability and growth of businesses, but also hinders the development of the world (Held, McGrew, Goldblatt, & Perraton 1999).

Labour Drain

Despite the fact that globalisation fosters labour mobility around the world, it greatly contributes to labour drain the labour market. Labour drain is one of the factors that contribute to unfair competition in international business. Organisations, which have the capability to attract and retain highly skilled labour, are better placed to compete in the global market.

Such organisation offer good pay packages to their employees in order to retain them and attract qualified experts from the market. On other hand, developed countries have been found to attract well trained workers from the developing countries due to good working and living conditions in such countries. Labour drain is therefore another key threat on the development of international business.

Labour drain also leads to unemployment in some countries. For instance, the importation of cheap labour by multinational corporations from developing countries has been blamed for increasing level of unemployment in developed countries. Labour mobility from one country to another also affects the factors in the labour market.

Excess supply of labour in the international labour has been associated with decline in wage rates around the world. Labour demand and supply also impact on the workforce planning strategies employed by organisation. The free movement of labour in the global economy has also weakened the labour sector in various parts of the world.

Globalisation has had a negative influence on the labour unions by denying them the opportunity to protect workers’ rights. In other cases, globalisation has introduced confusion in labour laws due to the disparities in provisions of the labour laws used in different countries across the world.

For example, ILO promotes uniform working hours of 40 hours per week, while labour entities in developing countries tend to promote 45 hours per week with low wage rates as compared to the developed countries (Sullivan, 2002).

Tax Avoidance and Tax Competition

Higher taxes imposed by the governments of various countries around the world have forced organisations in international business to employ tax avoidance and tax competition strategies. Such a move leads to unfair competition between the various companies. For instance, some international organisations establish their businesses where the governments charge low tax rates.

The companies also channel their returns through such countries. This practice has been manifested by multinational companies, such as Google and Facebook. The situation is best manifested by Google, which has been very competitive in the international market as compared to rivals, such as Yahoo and other online organisations.

Amazon has also employed the same strategies establishing its offices in countries like Luxembourg and Bermuda. Tax avoidance and competition tactics do not only hinder the growth of the local based companies, but also interfere with the development of international organisations.

On the other hand, some countries lower corporation taxes for international companies to ensure increased level of capital mobility. Reduced corporation tax may increase the rate of investment in a country. However, it reduces the level of tax income earned by the government.

Risk of Foreign Exchange Fluctuations

Another key threat that affects the development of international trade due to globalisation is fluctuations in foreign exchange rate. Globalisation exposes businesses to the risk of foreign exchange fluctuations, which affect profitability and growth of such companies. International organisations mainly trade in foreign currencies.

For instance, the sales and procurement of different items are conducted in foreign currency, which affects the sales revenues and procurement cost incurred by an organisation. A business organisation in a foreign country may experience great losses when translating its profits from a foreign currency to a local one. High translation costs may reduce the level of profits that are earned by an organisation.

On the other hand, during procurement, an organisation has to convert its local currency to a foreign currency that is accepted by the vendor. Translation cost may therefore increase the cost of procurement, hence increasing the cost of operation and production.

Fluctuations in foreign exchange rate are the key threats to international business. It reduces the level of profitability and raises the cost of doing business globally. The general economic conditions in the global arena also affect the development of international business. In the year 2008, multinational corporations from developed countries were greatly affected by global financial and economic crisis (Clark 1997).

Economic and financial factors, such as interest rate, inflation, and volatility of shares in the share market, have serious effects on international organisations due to unpredictable changes in the global economy.

Higher interest rates in international markets raise the cost of capital acquisition and reduce the pace of trade development. On the other hand, volatility of shares in the stock market also interferes with the profits earned by businesses in the financial sector (Held, McGrew, Goldblatt, & Perraton 1999).

Security Issues

Security factors are also some of the major threats that affect international companies, which stem from globalisation. Despite the fact the globalisation exposes a business to lucrative business opportunities; it also creates avenues of insecurity, which greatly influence the performance and the growth of international business. One of the most common insecurity factors in global trade is terrorism.

There is an increase in the number of terrorist activities because of free movement of goods and people around the world. Terrorists around the world target at developed nations that promote international trade. Marine piracy has also increased following the increase in shipping activities all over the globe. Another element of security that affects international business touches on data security (Sullivan, 2002).

Increasing on the use of computers and Internet is the major cause of data insecurity in global trade. Internet technology creates a framework where various businesses interact to exchange data and ideas for business facilitation.

However, such interactions expose the organisations in international trade to security risk factors, such as fraud, identity theft, and scams. Online fraud is one of the common threats that affect online transactions, such as payment and receipt of goods. Security threats may therefore lead to the loss of financial resources and important data in an organisation (Tabb 2002).

Political Risks

Globalisation also exposes international business to political risk factors which greatly influence the performance of a business. Such factors as political instability, laws, rules and regulations in different countries expose a business to various risks (Held, McGrew, Goldblatt, & Perraton 1999).

Political instability in a country creates disturbances in the business environment where market factors, such as demand and supply, are greatly affected. Moreover, rules and regulations imposed on various businesses and industries in a country also affect the performance of an international business (Sullivan, 2002).

For instance, regulations governing licensing and registration of businesses determine the pace of trade development in a country. Based on these factors, it is therefore important to acknowledge that globalisation is a clear threat to international business (Meredith 2000).

Reference List

Clark, I 1997, Globalization and fragmentation: international relations in the twentieth century , Oxford University Press, Oxford.

Daly, H 2001, ‘Globalization and Its Discontents,’ Philosophy and Public Policy Quarterly , vol. 21 no. 2/3, pp.17-21. Web.

Daniels, J Radebaugh, L & Sullivan, D 2007, International business: environment and operations , Prentice Hall, London.

Held, D, McGrew, A, Goldblatt, D, & Perraton, J 1999, Global transformations: politics, economics and culture , Polity Press, Cambridge.

Joshi, RM 2009 , International business , Oxford University Press, Oxford.

Meredith, M 2000, ‘Doing business internationally: an annotated bibliography’, Reference Services Review , vol. 28. no. 3, pp.223-239.

Satya, DG 1997, The political economy of globalization , Zed Books, Boston.

Shoham, A 2011, ‘The global recession issue: Introduction—Part I,’ Thunderbird International Business Review , vol. 53. no. 2, pp. 109-113.

Sullivan, JJ 2002, The future of corporate globalization: from the extended order to the global village , Quorum Books, New York.

Tabb, WK 2002, Unequal partners: a primer on globalization, New Press, New York.

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• International Trade and Starbucks Pages: 2 (473 words)
• Illegal logging and the international trade Pages: 1 (271 words)
• International Trade: Buying And Selling Of Goods Pages: 2 (579 words)
• International Trade Theory Pages: 14 (3971 words)
• Review of Theories of International Trade Pages: 4 (1051 words)

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2.1 What Is International Trade Theory?

Learning objectives.

• Understand international trade.
• Compare and contrast different trade theories.
• Determine which international trade theory is most relevant today and how it continues to evolve.

What Is International Trade?

International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.

People or entities trade because they believe that they benefit from the exchange. They may need or want the goods or services. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade.

In this section, you’ll learn about the different trade theories that have evolved over the past century and which are most relevant today. Additionally, you’ll explore the factors that impact international trade and how businesses and governments use these factors to their respective benefits to promote their interests.

What Are the Different International Trade Theories?

People have engaged in trade for thousands of years. Ancient history provides us with rich examples such as the Silk Road—the land and water trade routes that covered more than four thousand miles and connected the Mediterranean with Asia.

Wikimedia Commons – public domain.

“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A cooperative trade network…set the pattern that would endure for the next 6,000 years” (Ridley, 2010).

In more recent centuries, economists have focused on trying to understand and explain these trade patterns. Chapter 1 “Introduction” , Section 1.4 “The Globalization Debate” discussed how Thomas Friedman’s flat-world approach segments history into three stages: Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to 2000, and 3.0 from 2000 to the present. In Globalization 1.0, nations dominated global expansion. In Globalization 2.0, multinational companies ascended and pushed global development. Today, technology drives Globalization 3.0.

To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories.

Classical or Country-Based Trade Theories

Mercantilism.

Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus , or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit , or a situation where the value of imports is greater than the value of exports.

A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports. This strategy is called protectionism and is still used today.

Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations.

Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry.

Absolute Advantage

In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations (Smith, 1776). Smith offered a new trade theory called absolute advantage , which focused on the ability of a country to produce a good more efficiently than another nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization.

Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.

Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is comparative advantage. A person or a country will specialize in doing what they do relatively better. In reality, the world economy is more complex and consists of more than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory.

Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn’t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. Their theory, also called the factor proportions theory , stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand.

For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments.

Leontief Paradox

In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy closely and noted that the United States was abundant in capital and, therefore, should export more capital-intensive goods. However, his research using actual data showed the opposite: the United States was importing more capital-intensive goods. According to the factor proportions theory, the United States should have been importing labor-intensive goods, but instead it was actually exporting them. His analysis became known as the Leontief Paradox because it was the reverse of what was expected by the factor proportions theory. In subsequent years, economists have noted historically at that point in time, labor in the United States was both available in steady supply and more productive than in many other countries; hence it made sense to export labor-intensive goods. Over the decades, many economists have used theories and data to explain and minimize the impact of the paradox. However, what remains clear is that international trade is complex and is impacted by numerous and often-changing factors. Trade cannot be explained neatly by one single theory, and more importantly, our understanding of international trade theories continues to evolve.

Modern or Firm-Based Trade Theories

In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry trade , which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.

Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows.

Country Similarity Theory

Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers’ decision-making and purchasing processes.

Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing was the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.

Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include:

• research and development,
• the ownership of intellectual property rights,
• economies of scale,
• unique business processes or methods as well as extensive experience in the industry, and
• the control of resources or favorable access to raw materials.

Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

• Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.
• Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.
• Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.
• Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.

In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries.

Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.

Which Trade Theory Is Dominant Today?

The theories covered in this chapter are simply that—theories. While they have helped economists, governments, and businesses better understand international trade and how to promote, regulate, and manage it, these theories are occasionally contradicted by real-world events. Countries don’t have absolute advantages in many areas of production or services and, in fact, the factors of production aren’t neatly distributed between countries. Some countries have a disproportionate benefit of some factors. The United States has ample arable land that can be used for a wide range of agricultural products. It also has extensive access to capital. While it’s labor pool may not be the cheapest, it is among the best educated in the world. These advantages in the factors of production have helped the United States become the largest and richest economy in the world. Nevertheless, the United States also imports a vast amount of goods and services, as US consumers use their wealth to purchase what they need and want—much of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs.

As a result, it’s not clear that any one theory is dominant around the world. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. In practice, governments and companies use a combination of these theories to both interpret trends and develop strategy. Just as these theories have evolved over the past five hundred years, they will continue to change and adapt as new factors impact international trade.

Key Takeaways

• Trade is the concept of exchanging goods and services between two people or entities. International trade is the concept of this exchange between people or entities in two different countries. While a simplistic definition, the factors that impact trade are complex, and economists throughout the centuries have attempted to interpret trends and factors through the evolution of trade theories.
• There are two main categories of international trade—classical, country-based and modern, firm-based.
• Porter’s theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. He identified four key determinants: (1) local market resources and capabilities (factor conditions), (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

(AACSB: Reflective Thinking, Analytical Skills)

• What is international trade?
• Summarize the classical, country-based international trade theories. What are the differences between these theories, and how did the theories evolve?
• What are the modern, firm-based international trade theories?
• Describe how a business may use the trade theories to develop its business strategies. Use Porter’s four determinants in your explanation.

Ridley, M., “Humans: Why They Triumphed,” Wall Street Journal , May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html .

Smith, A., An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists.

International Business Copyright © 2017 by [Author removed at request of original publisher] is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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• Introduction

Historical overview

• The theory of international trade
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international trade

international trade , economic transactions that are made between countries. Among the items commonly traded are consumer goods, such as television sets and clothing; capital goods, such as machinery; and raw materials and food. Other transactions involve services, such as travel services and payments for foreign patents ( see service industry ). International trade transactions are facilitated by international financial payments, in which the private banking system and the central banks of the trading nations play important roles.

International trade and the accompanying financial transactions are generally conducted for the purpose of providing a nation with commodities it lacks in exchange for those that it produces in abundance; such transactions, functioning with other economic policies, tend to improve a nation’s standard of living . Much of the modern history of international relations concerns efforts to promote freer trade between nations. This article provides a historical overview of the structure of international trade and of the leading institutions that were developed to promote such trade.

The barter of goods or services among different peoples is an age-old practice, probably as old as human history. International trade, however, refers specifically to an exchange between members of different nations , and accounts and explanations of such trade begin (despite fragmentary earlier discussion) only with the rise of the modern nation-state at the close of the European Middle Ages. As political thinkers and philosophers began to examine the nature and function of the nation, trade with other countries became a particular topic of their inquiry. It is, accordingly, no surprise to find one of the earliest attempts to describe the function of international trade within that highly nationalistic body of thought now known as mercantilism .

Mercantilism

Mercantilist analysis, which reached the peak of its influence upon European thought in the 16th and 17th centuries, focused directly upon the welfare of the nation. It insisted that the acquisition of wealth, particularly wealth in the form of gold , was of paramount importance for national policy. Mercantilists took the virtues of gold almost as an article of faith; consequently, they never sought to explain adequately why the pursuit of gold deserved such a high priority in their economic plans.

Mercantilism was based on the conviction that national interests are inevitably in conflict—that one nation can increase its trade only at the expense of other nations. Thus, governments were led to impose price and wage controls, foster national industries, promote exports of finished goods and imports of raw materials, while at the same time limiting the exports of raw materials and the imports of finished goods. The state endeavoured to provide its citizens with a monopoly of the resources and trade outlets of its colonies.

The trade policy dictated by mercantilist philosophy was accordingly simple: encourage exports, discourage imports, and take the proceeds of the resulting export surplus in gold. Mercantilists’ ideas often were intellectually shallow, and indeed their trade policy may have been little more than a rationalization of the interests of a rising merchant class that wanted wider markets—hence the emphasis on expanding exports—coupled with protection against competition in the form of imported goods.

A typical illustration of the mercantilist spirit is the English Navigation Act of 1651, which reserved for the home country the right to trade with its colonies and prohibited the import of goods of non-European origin unless transported in ships flying the English flag. This law lingered until 1849. A similar policy was followed in France.

A strong reaction against mercantilist attitudes began to take shape toward the middle of the 18th century. In France, the economists known as Physiocrats demanded liberty of production and trade . In England, economist Adam Smith demonstrated in his book The Wealth of Nations (1776) the advantages of removing trade restrictions. Economists and businessmen voiced their opposition to excessively high and often prohibitive customs duties and urged the negotiation of trade agreements with foreign powers. This change in attitudes led to the signing of a number of agreements embodying the new liberal ideas about trade, among them the Anglo-French Treaty of 1786, which ended what had been an economic war between the two countries.

After Adam Smith, the basic tenets of mercantilism were no longer considered defensible. This did not, however, mean that nations abandoned all mercantilist policies. Restrictive economic policies were now justified by the claim that, up to a certain point, the government should keep foreign merchandise off the domestic market in order to shelter national production from outside competition. To this end, customs levies were introduced in increasing number, replacing outright bans on imports, which became less and less frequent.

In the middle of the 19th century, a protective customs policy effectively sheltered many national economies from outside competition. The French tariff of 1860, for example, charged extremely high rates on British products: 60 percent on pig iron; 40 to 50 percent on machinery; and 600 to 800 percent on woolen blankets. Transport costs between the two countries provided further protection.

A triumph for liberal ideas was the Anglo-French trade agreement of 1860 , which provided that French protective duties were to be reduced to a maximum of 25 percent within five years, with free entry of all French products except wines into Britain. This agreement was followed by other European trade pacts.

Resurgence of protectionism

A reaction in favour of protection spread throughout the Western world in the latter part of the 19th century. Germany adopted a systematically protectionist policy and was soon followed by most other nations. Shortly after 1860, during the Civil War , the United States raised its duties sharply; the McKinley Tariff Act of 1890 was ultraprotectionist. The United Kingdom was the only country to remain faithful to the principles of free trade .

But the protectionism of the last quarter of the 19th century was mild by comparison with the mercantilist policies that had been common in the 17th century and were to be revived between the two world wars. Extensive economic liberty prevailed by 1913. Quantitative restrictions were unheard of, and customs duties were low and stable. Currencies were freely convertible into gold, which in effect was a common international money . Balance-of-payments problems were few. People who wished to settle and work in a country could go where they wished with few restrictions; they could open businesses, enter trade, or export capital freely. Equal opportunity to compete was the general rule, the sole exception being the existence of limited customs preferences between certain countries, most usually between a home country and its colonies. Trade was freer throughout the Western world in 1913 than it was in Europe in 1970.

• Corpus ID: 821830

The Importance of International Trade in the World

• G. Vijayasri
• Published 16 October 2013
• International Journal of Marketing, Financial Services and Management Research

33 Citations

Legal overview of international trade in international business transactions in indonesia, impact of liberalization and globalization on india’s foreign trade, agent-based modelling for international trade, the effect of exchange rate volatility on international trade in tanzania, the importance of iso 9001 on developing countries with reference to international trade: a review, international trade and investment: a review and research agenda, economic relations of ethiopia and india: trade and agricultural investments after 1991, a study on the impacts of export and import on ghana’s economic growth, export trade and real exchange rate dynamics in sub-saharan africa: a dynamic panel analysis, trade intensity: iraq’s status in the global market, 18 references, international trade and economic development, intra-industry trade and the integration of developing countries in the world economy, international economics: theory and policy, international trade and economic development., on the principles of political economy and taxation, terms of trade and economic development, increasing returns, monopolistic competition, and international trade, an inquiry into the nature and causes of the wealth of nations, export and economic growth in india: empirical evidence, related papers.

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5 Common Challenges of International Business You Should Consider

• 24 Nov 2020

The world is big and, when it comes to business, everyone is intertwined. Whether or not you produce and sell goods internationally, global business impacts every organization.

“Everybody has to care about macroeconomics and the global economy,” says Harvard Business School Professor Forest Reinhardt in the online course Global Business .

In today's fast-paced and interconnected world, doing international business has become an essential part of companies’ growth and expansion strategies. Yet, this journey is filled with obstacles that you must overcome to succeed.

So, how can you, as a business owner, manager, or employee, stay informed and find your organization’s place in the global market?

Here’s an introduction to international business, some common challenges to consider, and suggestions for how you can prepare.

Access your free e-book today.

What Is International Business?

International business is the production and sale of goods and services between countries. There are several ways a business can be international:

• It produces goods domestically and sells both domestically and internationally.
• It produces goods in a different country but sells domestically.
• It produces goods in a different country and sells both domestically and internationally.

Businesses typically produce goods overseas due to lower labor costs or taxes, and they sell products and services in the global market because of the high potential for gaining a larger audience, new customers, and increased revenue.

“Although international business is extremely exciting, it can also be risky,” Reinhardt says in Global Business .

But what are the factors that affect international business?

The most common include:

• Shifting economic stability
• Ongoing geopolitical tensions
• Changing global trade networks

These highlight just a few of the current global business issues affecting organizations though. Every country has its own government, policies, laws, cultures, languages, currency, time zones, and inflation rate. Therefore, navigating the global business landscape can be difficult. This means business owners need to learn how to adapt to these challenges. Here are five to consider.

Related: 3 Economic Indicators to Consider Before Expanding Your Business Globally

5 Common Challenges of International Business

1. language barriers.

When engaging in international business, it’s important to consider the languages spoken in the countries to which you’re looking to expand.

Does your product messaging translate well into another language? Consider hiring an interpreter and consulting a native speaker and resident of each country.

One example of a product “lost in translation” comes from luxury car brand Mercedes-Benz. When entering the Chinese market, the company chose a Mandarin Chinese name that sounded similar to “Benz”: Bēnsǐ. The name translates to “rush to death” in Mandarin Chinese, which wasn’t the impression Mercedes-Benz wanted to make with its new audience. The company quickly adapted, changing its Chinese name to Bēnchí, which translates to “run quickly, speed, or gallop.”

It’s also critical to consider the languages spoken by your company’s team members based in international offices. Once again, investing in interpreters can help ensure your business continues to operate smoothly.

2. Cultural Differences

Just as each country has its own makeup of languages, each also has its own specific culture or blend of cultures. Culture consists of the holidays, arts, traditions, foods, and social norms followed by a specific group of people. It’s important and enriching to learn about the cultures of countries where you’ll be doing business.

When managing teams in offices abroad, selling products to an international retailer or potential client, or running an overseas production facility, demonstrating that you’ve taken the time to understand their cultures can project the respect and emotional intelligence necessary to conduct business successfully.

One example of a cultural difference between the United States and Spain is the hours of a typical workday. In the United States, working hours are 9 a.m. to 5 p.m., often extending earlier or later. In Spain, however, working hours are typically 9 a.m. to 1:30 p.m. and 4:30 to 8 p.m. The break in the middle of the workday allows for a siesta, which is a rest taken after lunch in many Mediterranean and European countries.

3. Managing Global Teams

Another challenge of international business is managing employees who live all over the world. When trying to function as a team, it can be difficult to account for language barriers, cultural differences, time zones, and varying levels of technology access and reliance.

To build and maintain a strong working relationship with your global team , facilitate regular check-ins, preferably using a video conferencing platform so you can interact in real time.

Research by Gallup shows that employees who have regular check-ins with their managers are three times more likely to be engaged at work than employees who don’t.

When distance divides teams, as it has for many during the COVID-19 pandemic , communication is key to ensuring everyone feels valued and engaged.

Related: How to Foster Employee Engagement When Your Team Is Remote

4. Currency Exchange and Inflation Rates

Another common issue with international trade is navigating foreign exchange rates. The value of a dollar in your country won’t always equal the same amount in other countries’ currency, nor will the value of currency consistently be worth the same amount of goods and services.

Familiarize yourself with currency exchange rates between your country and those where you plan to do business. The exchange rate is the relative value between two nation’s currencies. For instance, the current exchange rate from the Canadian dollar to the US dollar is 0.74, meaning one Canadian dollar is equal to 74 cents in US currency. Make it a point to watch exchange rates closely, as they can fluctuate.

It’s also important to monitor inflation rates, which are the rates that general price levels in an economy increase year over year, expressed as a percentage. Inflation rates vary across countries and can impact materials and labor costs, as well as product pricing.

Understanding and closely following these two rates can provide important information about the value of your company’s product in various locations over time and help prevent international trade problems.

5. Nuances of Foreign Politics, Policy, and Relations

Business doesn’t exist in a vacuum—it’s influenced by politics, policies, laws, and relationships between countries. Because those relationships can be extremely nuanced, it’s important that you closely follow news related to countries where you do business.

Political leaders’ decisions can have a significant impact on various aspects of a country, including taxes, labor laws, raw material costs, transportation infrastructure, and educational systems.

One hypothetical example Reinhardt presents in Global Business is that if the Chinese government decided to subsidize Chinese dairy farms, it would impact dairy farmers in all surrounding countries. This is because, with extra funding, Chinese dairy farms may produce a surplus of dairy products, causing them to expand their markets to neighboring countries.

It’s both exciting and intimidating that the nuances of international politics, policies, and relations can impact your business. Stay informed and make strategic decisions as new information arises.

Preparing for International Business Challenges

If you aim to expand your business, it’s important to prepare for international business challenges. However, that doesn’t mean that it’s not an opportunity for enormous organizational growth.

To prepare for those challenges, vary your news intake and closely follow foreign politics, make connections in countries where you hope to do business, invest in interpreters to overcome language barriers, and consider taking a global business course to develop your international business skills and prepare for today's nuanced, interconnected business world.

Are you interested in breaking into a global market? Sharpen your knowledge of the international business world with our four-week Global Business course, and explore our other online strategy courses .

This post was updated on April 19, 2024. It was originally published on November 24, 2020.

About the Author

• Projects & Operations

Stronger Open Trade Policies Enable Economic Growth for All

Although globalization and trade present new opportunities, it is not without challenges. Developing countries may struggle to compete on a global scale for many reasons.

• Inefficient or inadequate systems of transportation, logistics, or customs;
• Poor connectivity in telecommunications, financial markets or information technology;
• Complicated regulatory environments that discourage new investments;
• Anticompetitive behavior by major market players or cartels that stifle innovation, productivity, or market growth.

The increasing complexity of trade has serious implications for the world’s poor, who often are disproportionately disconnected from global, regional – or even local – markets. Poverty is often concentrated in geographic areas that are poorly connected to active economic centers. Firms and communities in these areas miss opportunities to develop skilled, competitive workforces; they are not integrated in global production chains and are less able to diversify their products and skills.

There are also distributional consequences of increasing trade. While on aggregate, economies gain enormously from increasing trade, as competition increases and many good jobs are created in export sectors—the wages of workers in import-competing industries may suffer or some workers may lose their jobs.

The WBG is supportive of an open, rules-based, predictable multilateral trading system, with the goal of helping countries participate in and enjoy the benefits of such a system.

Key strategies in this agenda include:

• Trade facilitation, logistics, and border management: helping countries integrate into global value chains (GVCs) through targeted reforms and investments;
• Trade agreements: advising countries on their technical details and supporting implementation of commitments made through these agreements;
• Emphasizing trade and competitiveness at the core of national development strategies
• Aid for Trade: Among multilateral institutions, the Bank Group is the largest provider of “Aid for Trade,” a multilateral initiative designed to assist developing countries, especially low-income countries, spur growth by integrating into the world economy. 
• Markets and competition policy: encouraging growth and shared prosperity by opening and transforming markets.

In 2017, trade volumes grew by 4.3%, the fastest rate in 6 years. Behind increased trade levels are countries whose GDP is growing, companies who are trading goods across borders and citizens who can access goods and services at lower prices. To further enhance global trade, the World Bank works with governments to address trade obstacles by designing and implementing policies that maximize competitiveness, increase connectivity, and facilitate trade. In line with twin goals of eradicating extreme poverty and increasing shared prosperity, the World Bank Group helps its client countries improve their access to developed country markets and enhance their participation in the world economy. 

Trade advisory and support work spans 111 Bank lending projects in 57 countries, 219 Bank advisory tasks in 64 countries, and 56 IFC Advisory projects in 35 countries including through the World Bank Trade Facilitation Support Program (TFSP) and the Umbrella Facility for Trade (UF). 

The WBG’s global, regional, and country trade engagements have boosted trade competitiveness, inducing predictability in trade operations, lowering a variety of trade costs, opening and creating markets, and prioritizing inclusive trade integration. Prominent results from IBRD operations include:

Bosnia and Herzegovina: A Bank operation supported reforms to facilitate cross-border trade. The project helped simplify government processes for issuance of export-import licenses, made it easier to obtain permits, and reduced  approval costs. By closing, the project resulted saved businesses an estimated $1.26 million in compliance costs, a reduction of approximately 4 percent.  The reductions in trade-related administrative costs helped strengthen the business environment and reduced the costs of doing business in the country. By reducing trade barriers for businesses, this project enhanced Bosnia and Herzegovina’s trade competitiveness  and facilitated  economic integration with the neighboring European Union market.

Macedonia: the WBG supported government efforts to improve the efficiency of trade logistics services (two projects under a programmatic approach). The operation included measures to make inspections more efficient to foster cross-border trade and to support the transport industry to be export-ready by incentivizing fleet upgrades to comply with EU emission standards. Results include a 70 percent reduction in physical border inspections, with reduced transit times for both exports and imports. Furthermore, the compliance rate of new vehicles with Eurozone standards was 100 percent.

Indonesia: to support trade facilitation, the WBG leveraged provisions of development policy lending (DPL) combined with investment project financing (IPF). The DPL supported work to implement procedures, customs, and formulation of reduced and simplified non-tariff barriers. Results include a reduction in the number of days needed to export and import: between 2009 and 2012, time to export was reduced from 21 to 17 days and time to import was reduced from 27 to 23 days. The IPF operation financed investments and technical assistance for the Directorate General of Customs and Excise to strengthen client services through improved customs operations and trade facilitation.  

Bank Group Contribution

The Bank is working with governments to tackle trade-related challenges, with financing commitments by end-2017 totaling over $22.5 billion ($12.6 billion IBRD and $9.9 billion IDA), up from just $3.3 billion in 2004.

The Umbrella Facility for Trade trust fund (UF) was launched in April 22, 2017. The UF is an IBRD-led Tripartite trust fund that has been developed to support analytical and knowledge work on global and regional trade issues in IBRD and IDA countries. Over the next six years, the UF will support four key areas of the WBG’s trade work, specifically:

• trade competitiveness and diversification;
• trade facilitation and transport logistics;
• support for market access and international trade cooperation; and
• managing shocks and promoting greater inclusion (e.g. trade and poverty; trade-gender linkages).

The UF has received contributions from DFID, SECO, Sida, the Netherlands and Norway. The total envelope over six years is currently estimated to be US$41 million.

The Trade Facilitation Support Program (TFSP), which includes support through an IFC-led Tripartite trust fund, was launched in June 2014 with support from nine development partners – Australia, Canada, EU, Norway, Netherlands, Sweden, Switzerland, UK, USA –totaling US$35 million. The TFSP provides implementation support for IBRD or IDA countries seeking assistance in aligning their trade practices with the World Trade Organization Trade Facilitation Agreement (WTO TFA), which entered into force in February 2017.

The World Bank Group works with a wide range of stakeholders, including donor and client countries, the private sector, CSOs, multilateral institutions and regional economic communities among others. Among the partners are trade champions that are leaders in promoting an open, rules-based international trading system.

The private sector is increasingly interested in ensuring that free trade is protected and helps support business opportunities including entry and growth for SMEs and MSMEs as well as participation in global value chains.

Donors contribute to WBG trust funds that support trade and investment climate. Among them are DFID, Agence Francaise de Developpement, UNIDO, the Asian Development Bank, Islamic Development Bank, USAID, JICA, the Gates Foundation, WTO, OECD, IMF, Switzerland’s State Secretariat for Economic Affairs, the Swedish International Development and Cooperation Agency, Australian Aid, European Commission, Government of Canada, Norwegian Ministry of Foreign Affairs, UKAID, and the Norwegian Ministry of Foreign Affairs.

The Umbrella Facility for Trade trust fund has received contributions from DFID, SECO, Sida, the Netherlands and Norway.

The Trade Facilitation Support Program (TFSP), which includes support through an IFC-led Tripartite trust fund, received support from nine development partners – Australia, Canada, EU, Norway, Netherlands, Sweden, Switzerland, UK, USA –totaling US$35 million.

Moving Forward

Countries are increasingly turning to the World Bank Group for advice on trade and, more widely, on investment climate reform to ensure competitiveness. The WBG has an opportunity to contribute by sharing the technical evidence that helps developing countries make sound policy decisions on trade and investment climate-related issues that will be critical for future growth and poverty reduction. In February 2017, the World Trade Organization’s Trade Facilitation Agreement entered into force, spearheading a global effort to reduce trade costs and help countries better connect to the global economy. This milestone presents an opportunity for the World Bank Group to further assist countries to design practical reform strategies – and their implementation – to pursue poverty reduction and shared prosperity.

Home — Essay Samples — Economics — International Trade — International Trade: Benefits and Challenges

International Trade: Benefits and Challenges

• Categories: International Business International Trade

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Published: Sep 12, 2023

Words: 778 | Pages: 2 | 4 min read

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Benefits of international trade, challenges of international trade.

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