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International Trade in a Flat World

Some small businesses in the U.S. think the landscape of the world market is too large to find a niche. However, nearly 97 percent of exports are handled by small businesses. Add to that, a large number of potential customers are outside the country. This puts foreign markets and sales opportunities well within reach of small businesses that are looking to expand.

Globalization is the conduit between diverse customers and expansion into international trade. Some believe that globalization weakens natural sovereignty when corporations ship jobs overseas for a cheaper labor force. However, developing nations can use globalization to their advantage. The economic principles behind international trade guarantees that one cannot exist without the other.

What is International Trade?

Basically, international trade consists of the exchange of goods and services between countries through imports and exports. This type of trade system connects a world economy to a national economy within one country. There has been a steady increase in the volume, scale and efficiency of international trade for over 40 years.

Because of this interconnectedness, prices, and supply and demand that impact a small business operating within its country's borders are affected by global events. Changes in political systems, for instance, could increase the labor costs of doing business in a foreign country.

The domino effect is an increase in manufacturing costs in the country and a price increase for consumers. To put this into perspective, a pair of sneakers or cell phone manufactured in Asia will cost more at a mall in North Dakota. Likewise, a decrease in labor costs will decrease the price you pay.

What is in it for Countries?

Wealthy countries not only have greater opportunities to trade on global markets, but they can also use their resources efficiently. An abundance of land, labor, technology and capital resources allows these countries to produce goods at a cheaper cost. Countries that lack the capabilities to produce goods may have the option to enter into a trade agreement with countries that can.

To illustrate, consider the production of wine and cotton jerseys by Country A and Country B. Country A produces 10 bottles of wine and 20 cotton jerseys each year. Country B is a wealthy country that can produce 20 bottles of wine and 10 cotton jerseys. Both countries produce a total of 30 units.

However, Country A produces the wine bottles in four hours and the jerseys in five hours. On the other hand, Country B takes three hours to produce 20 bottles of wine and four hours to make the jerseys.

Both countries realize that they have a comparative advantage by focusing on the product that they can produce more efficiently. They decide to create specialized products each year and trade equal portions of unit outputs with other countries. This reduces the cost and maximizes their efficiency at the same time.

What is in it for Consumers?

Importing goods and services from other countries exposes consumers to products that are not always easily accessible in their native countries. The international market includes nearly every kind of product that one can imagine: food, clothing, jewelry, water, wine and spare parts. Commodities such as stocks, oil and currencies are also available for trading on the international market. Services traded internationally include transportation, tourism and banking.

When countries find resourceful ways to trade goods and services, supply is available to meet consumer demand. The price decreases in theory giving consumers more disposable income to make purchases that stimulate the economy.

The trade off for having global consumers not only improves production efficiency, but also encourages foreign direct investment. Basically, FDI is an investment from an entity based in one country into a company that operates in another. Theoretically, economies can become competitive participants on the global stage because investors are willing to prop up countries.

Generally, investors view a skilled workforces, and growth prospects in goods and services. More skilled workers raises employment levels in the country and helps to improve the gross domestic product of the country. Investors benefit from the growth and expansion with higher revenues.

The Bottom Line of International Trade

International trade levels the playing field in a flat world with many different competing forces. Each country has an equal opportunity to exploit their resources for growth and expansion. Some opponents of international trade argue that inefficiencies will compromise the viability of developing nations.

What remains true is that the global economy is in a perpetual state of change. This gives developing nations a chance to implement strategies that will strengthen their national economy. Growth opportunities will follow.