How Does International Trade Work?


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When the Swiss export chocolate to Honduras they can use the money they earn to import Honduran bananas-or they can use it to pay for Kuwaiti oil or vacation in Hawaii. The basic idea International trade is simple: each country produces goods or services that can either be consumed at home or exported abroad. The money earned from these exports can then be used to pay for imports of other goods and services.

The main difference between domestic and international trade is the use of foreign currencies, and goods crossing international borders can be paid for in any internationally accepted currency. It is all the same, as long as the money ends up in the pocket of exporter.

Most trade is added up in U.S. dollars, although the trading itself often involves in myriad currencies. In Montreal, someone importing CD players first pays in Yen. Then, when the CD player is sold at a record store in Paris, the importer is paid in Canadian dollar- which are then exchanged for yen to pay for more imports.

Trade and investment is a two-way street: what goes out as exports of goods and services comes back in-in the form of money. And money flowing into an economy doesn’t just sit around collecting dust. It is usually invested, or it is used to purchase goods and services-both at home and abroad. When a hardworking country exports more than imports, it end up with money to invest in the global economy.

It is hard to convince anti-globalization protesters that trade ends up making both sides better off, but it does. One only need look at rich countries around the world down through history. Those nations that opened their borders to trade were the ones who prospered: ancient Greece, medieval China. Renaissance Italy, golden-age Holland, nineteenth-century England, postwar America, and now almost every country in the world economy.

Image credit. © Eric Vidal / Reuters

Great wealth comes from trading, and there is a reason. No country would sell something abroad unless it could make a profit somehow. This profit then is used to make life better for the economy as a whole. Even if the money is not distributed evenly-which is a social issue that every country has to deal with-it does not mean that people are worse off because of trade. With a minimum of trade barriers, consumers are given the opportunity to buy the best products at the best prices. By opening up markets, a government allows its citizens to export those things that they are best a producing and to import the rest, choosing from the best the world has to offer.

By opening up borders to trade, rich countries are also able to stimulate growth in the developing countries-which often makes both sides better off. By importing cheaper goods from the developing countries not only provide their own consumers with a wider range of products to choose from, they stimulate the growth of jobs in countries where people are desperate to earn enough to live in. By giving the developing countries an economic “jump start,” rich countries are able to expand their own economies as well.

As developing countries grow and their citizens suddenly have disposable income, the first thing they usually buy are goods and services from the industrialized countries, such as automobiles, movies, and computers. In the end, increased trade leads to more growth, which means more jobs for almost every-one

When a country decides to erect trade barriers, the result usually damages everyone-including those people the barriers were originally means to protect. The Great Depression of the 1930s, for example, spread around the world when the United States decided to erect trade barriers to protect local producers.  As other countries retaliated, trade plummeted, jobs were lost, and the world entered a long period of economic decline.

Severe economic depression in 1930s at the United States

 


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