International Trade (2024)

An exchange involving a good or service conducted between at least two different countries

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International trade is an exchange involving a good or service conducted between at least two different countries. The exchanges can be imports or exports. An import refers to a good or service brought into the domestic country. An export refers to a good or service sold to a foreign country.

International Trade (1)

International trade is a method of economic interaction between international entities and is an example of economic linkage. Other forms of economic linkages include (1) foreign financial investment, (2) multinational corporations, and (3) foreign employees. The growth in these forms of economic linkages is known as globalization.


  • International trade is an exchange of a good or service involving at least two different countries.
  • Comparative advantage allows for gains from international trade, ultimately leading to increased consumption of goods.
  • Two major protectionist trade policies are tariffs and import quotas.

Why Does International Trade Occur?

International trade occurs because one country enjoys a comparative advantage in the production of a certain good or service, specifically if the opportunity cost of producing that good or service is lower for that country than any other country. If a country opts not to trade with other countries, it is considered to be an autarky.

If we consider a two-country model, both countries can gain from specialization and trade. Specialization and trade will allow each country to produce the product they possess a comparative advantage in and then trade, and ultimately consume more of both goods. Therefore, there are gains from trade.

Sources of Comparative Advantage

1. International differences in climate

International differences in climate play a significant role in international trade – for example, tropical countries export products like coffee and sugar. In contrast, countries in more temperate areas export wheat or corn. Trade is also driven by differences in seasons and geography.

2. Differences in factor endowments

Differences in factor endowments imply that some countries are more resource-rich than others in land, labor, capital, and human capital. According to the Heckscher-Ohlin model, a country enjoys a comparative advantage in production if the resources are abundantly available within the country; for example, Canada exhibits a comparative advantage in the forestry industry. It is primarily driven because the opportunity cost is lower for a country rich in the related resource.

3. Differences in technology

Differences in technology are most commonly observed in superior production processes seen in different countries. For example, consider Japan in the 1970s – a country that is not overly resource-rich yet enjoys a comparative advantage in automobile manufacturing. The Japanese are able to produce more output with a given input than any other country, and it comes down to superior Japanese technology.

Examples of International Trade Policies

Most economists favor free trade agreements because of the potential for gains from trade and comparative advantage. This is because these economists believe that government intervention will reduce the efficiency of the markets. Yet, many governments introduce protectionist policies to protect domestic producers from foreign producers. There are two major protectionist policies:

1. Tariffs

A tariff is an excise that is paid on the sale of imported goods. Tariffs are put in place to discourage imports and protect domestic producers and are a source of government revenue.

A tariff raises the price received by domestic producers and the price paid by domestic consumers. Tariffs generate deadweight losses because they increase inefficiencies, as some mutually beneficial trades go unexecuted, and an economy’s resources are wasted on inefficient production.

2. Import quotas

An import quota refers to a legal limit on the quantity of a good that can be imported within a country. Generally, import quotas are administered through licensing agreements. An import quota leads to a similar result as a tariff; however, instead of generating tax revenue, the fees are paid to the license holder as quota rent.

Arguments for a Protectionist Trade Policy

The three major arguments for a protectionist trade policy are:

  1. National security
  2. Job creation
  3. Protection of infant industries

Generally, tariffs or import quotas lead to gains for producers and losses for consumers. Therefore, the imposition of tariffs or import quotas is generally created from the political influence of the producers.

Additional Resources

Thank you for reading CFI’s guide to International Trade. To keep advancing your career, the additional CFI resources below will be useful:

International Trade (2024)


What is international trade answers? ›

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.

How effective is international trade? ›

Trade contributes to global efficiency. When a country opens up to trade, capital and labor shift toward industries in which they are used more efficiently. That movement provides society a higher level of economic welfare.

How do you solve international trade? ›

To improve chances of success, any global strategy for trade should first consider focusing on seven key concepts:
  1. Have a Strong Product Offering. ...
  2. Be Sure There's a Market Opportunity. ...
  3. Work Out Supply Chain Logistics. ...
  4. Comply With International Law. ...
  5. Form Strategic Partnerships. ...
  6. Leverage Government Resources.
Nov 23, 2023

What are the key questions of international trade? ›

International Trade: Frequently Asked Questions (FAQ)
  • What is trade? ...
  • What is the difference between global trade and international trade? ...
  • What is the impact of the Coronavirus pandemic on global trade? ...
  • Which product is the most commonly imported product globally? ...
  • Does trade necessarily require a sales transaction?
Jan 13, 2019

What is trade short answer? ›

Trade is the exchange of goods and services between parties for mutually beneficial purposes. People and countries trade to improve their circ*mstances and quality of life. It also develops relationships between governments and fosters friendship and trust.

What is international trade in your own words? ›

International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significant share of gross domestic product (GDP).

Why is international trade so important? ›

International trade is important because countries rely on other countries for the import of goods that can't be readily found domestically. If a country specialises in the exports of goods, it may have more supply of certain raw materials than there is demand in its own markets.

Why is international trade hard? ›

Trade policies

Many countries have substantial barriers to trade in services in areas such as transportation, communications, and the financial sector; others have policies that welcome foreign competition. Moreover, trade barriers affect some countries more than others.

Why was trade so important? ›

Trade is critical to America's prosperity - fueling economic growth, supporting good jobs at home, raising living standards and helping Americans provide for their families with affordable goods and services.

How to improve global trade? ›

Key Strategies for International Trade Game Plan
  1. Strong Offerings. Any successful plan for international trade has to start with a high-quality, unique product. ...
  2. Market Opportunity. ...
  3. Supply Chain Logistics. ...
  4. International Law Compliance. ...
  5. Strategic Partnerships. ...
  6. Local Resources.
Sep 11, 2020

How can international trade be negative? ›

Here are a few of the disadvantages of international trade:
  1. Disadvantages of International Shipping Customs and Duties. International shipping companies make it easy to ship packages almost anywhere in the world. ...
  2. Language Barriers. ...
  3. Cultural Differences. ...
  4. Servicing Customers. ...
  5. Returning Products. ...
  6. Intellectual Property Theft.
Mar 15, 2018

Does the US have any trade barriers? ›

Technical barriers to trade include import authorizations and licensing, labeling and packaging requirements, and product quality and safety requirements. Some of these may be critical to ensure the safety of US consumers, but others may be in place to limit the extent of international trade.

What are the 5 ways to international trade? ›

Essential Tips for Successful International Trade
  • Market Research: ...
  • Build Strong Relationships: ...
  • Understand International Laws and Regulations: ...
  • Adapt to Local Cultures: ...
  • Mitigate Currency Risks: ...
  • Export and Import Data: ...
  • Embrace Technology: ...
  • Prioritize Quality and Standards:
Jul 21, 2023

What are three international trade examples? ›

So, in this blog, we'll discuss the 3 different types of international trade – Export Trade, Import Trade and Entrepot Trade.

What is the main international trade theory? ›

A modern, firm-based international trade theory that explains intraindustry trade by stating that countries with the most similarities in factors such as incomes, consumer habits, market preferences, stage of technology, communications, degree of industrialization, and others will be more likely to engage in trade ...

What is the definition of international trade quizlet? ›

What is international trade. Means the exchange of capital (money), goods, and services across international borders or between nations.

What is international trade and why is it important? ›

International trade is important because countries rely on other countries for the import of goods that can't be readily found domestically. If a country specialises in the exports of goods, it may have more supply of certain raw materials than there is demand in its own markets.

What is international trade explain with two examples? ›

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.

What is international trade and explain its types? ›

International trade refers to the exchange of goods and services between the countries of the world. It exists in two forms, namely: export, which consists of shipping products to benefit other countries; import, which consists of bringing foreign products into a given territory.

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