Understanding the Global Trade Market

Every year goods and services worth trillions of dollars are traded across the globe. In 2019, the global trade value of goods exported worldwide accounted for about USD 19 trillion. In comparison, the numbers stood at approximately USD 6.45 trillion in 2000. Global Trade has tripled in the last 20 years.

The exponential rise in the value of goods being traded between the nations is a clear reflection of the rate at which international trade has grown. From small toys to large heavy-gauge machinery, everything is traded in modern international markets.

But, what exactly is global trade? That is exactly what we are going to answer in this article and we are also going to help you understand how exactly all of it works.

What is Global Trade?

Global trade, better known as international trade, is the export and import of trade and services across international boundaries. International trade is not a new concept. Human historical records trace back international trade to the ancient world, with records of long-distance trade between the Indus Valley Civilization and Mesopotamia in 3000 BC being among its earliest examples. However, the integration of national economies into an interconnected global economy is a more recent phenomenon.

Modern historical perspective marks the globalization of trade in two phases. The first began in the 19th century and ended with World War I in 1918. The second began after World War II and continues to this day. Before these two phases, global trade was driven by colonialism, but it never exceeded 10 percent of the world’s total gross domestic product.

The expansion of global trade in the last century is self-evident. In 2019, global trade was 40 times more valuable than it was in 1913. Further, as much as one-fourth of all global production was exported. However, after studying complex supply chain networks feeding global trade, almost 30 percent of the value of global exports was created by foreign inputs.

How Global Trade Works

The idea of global trade is based on the principle of comparative advantage. It was first propounded by British economist David Ricardo in the early nineteenth century. The theory contended a nation should focus its resources on producing goods or services where it had a comparative advantage. This meant higher production efficiency at a cost lower than in any other country.

To illustrate this better, if Portugal produced more wine per man hour than England, but England produced more cloth per man hour than Portugal, it was of greater comparative advantage for Portugal to focus on the production of wine and for England to manufacture cloth. This created specialization in trade at a lower cost, which drove an increase in production and created growth for both countries.

In this context, it is also interesting to note the world’s largest exporter by value China is also among the top importers in the world. On the one hand, it gains from selling broadcasting equipment, computers, office machine parts, integrated circuits, and telephones. But, on the other hand, it needs to source and buy integrated circuits, crude petroleum, iron ore, cars, and gold from across the globe.

Today, the various elements included in global trade are far more complex than in David Ricardo’s time. It begins from the point of manufacture and continues to the point of sale.

The various milestones that products or services could pass through include market research and product definition, supply of raw materials, manufacture, quality control, compliance with regulations, packaging, customs shipping, marketing and product sales. While some of these are traditional elements, newer areas such as managing product research, compliance, and marketing have also become essential for success.

Why is Global Trade Important?

Given increased production and economic growth as its premise, global trade is crucial for both the success of countries and businesses in several ways. Here’s why global trade is important:

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Barriers to Global Trade

Yet for international trade to enable the global economy to grow, it must sometimes surmount several hurdles. This includes natural barriers, tariff barriers, and non-tariff barriers. Let us understand how each of these has an impact on global trade:

Natural barriers

These are set by physical or cultural factors. For example, if you live in a landlocked country, such as Afghanistan, Central African Republic, or Burundi, imported goods are more likely to take longer to reach you, and this would be at a higher cost. That is why the World Bank estimates the world’s 31 landlocked developing countries include 16 of the poorest nations in the world. Cultural factors can also pose a challenge, as many companies seeking to set up back offices in China to support their American staff and customers, or import services have found that they struggle to learn a new language to communicate. In these cases, countries like the Philippines and Ireland have emerged as preferred offshore destinations because of their familiarity with English and greater cultural affinity.

Tariff barriers

Such barriers take the form of taxes levied on imported goods or services, which restrict trade. Take the EU’s proposed carbon border tax, based on carbon emissions credited to goods imported into the region. While the mission to drive change is laudable, tariffs such as these are perceived as barriers by trading partners.

Non-tariff barriers

These are barriers to the import and export of goods and services set by legislation, government bans, and trade agreements. A recent example is the Indian government’s ban on the Chinese social platform TikTok and other apps, which could have far-reaching implications for global trade in the region.

Global Trade Categories

Import Trade

Simply put, import means purchasing goods and services from another country or a set of countries to meet the domestic needs for those commodities. For instance, the United States heavily depends on China for almost every import category. Topping the list, it primarily imports machinery & electrical items, miscellaneous items, and textiles from the Asian country. Meanwhile, the United States imports plastics/rubber, transportation, and foodstuff from India.

This is because China and India are massive producers of these respective goods. They offer competitive rates in the global trade market and even transport goods at cheaper prices to the United States.

Similarly, the Arab nations import agricultural and apparel-based products from India as they’re easier to procure and cheaper to import, than producing them in their own nations.

Export Trade

Exports are exactly the opposite of import trades. They’re a type of international dealing wherein a country sends goods and services to another country in need of those commodities. Considering the above example, in the case of the United States, China and India are the exporters of their respective commodities to the States.

They help the United States fulfill its requirements for many goods and services including, exporting heavy-gage machinery, electrical equipment, textile, plastics/rubber, transportation, foodstuff, and many more.

Entrepot Trade

Entrepot is another form of international trade that combines both import and export trade. In this type of trade, goods and services are imported from one country and sold to another nation in need of those commodities. You can also say that commodities imported are not consumed within the domestic market of the importing country, rather they’re exported to foreign countries at a profit.

For instance, India imports rubber and related goods from Thailand, processes it into semi-finished or finished goods, and exports it to other countries like Japan. Such a trade is known as entrepot trade.

Many countries today do entrepot trade because of the reasons mentioned below:

• Lack of direct connection or absence of a trade agreement between the two nations
• Better processing and logistical facilities are offered by the third nation
• No banking facility is available in the importing country for the trade finance

Advantages and Disadvantages of Global Trade

The exponential growth in global trade is a testimony to the fact that it offers many benefits. However, every coin has two sides, and so does global trade. Let us explore the advantages and disadvantages of global trade.

Advantages

• Encourages Specialization: Global trade allows for each country to specialize in manufacturing commodities that are specific to their geography, capacity, and skills. It is a great way for countries to differentiate and grow in areas that work best for them.
• High-Quality Goods: Global trade allows countries to get high-quality goods at comparatively lower prices. One of the reasons why global trade has grown so much in recent decades is the cheaper access to better-finished commodities at cheaper prices.
• Competitiveness: Adding to the previous point, the end consumer can get better goods since the very nature of global trade creates competitiveness among businesses beyond national borders.
• Technology Transfer: Global trade has enabled many countries to sign unique trade agreements. One of them emphasizes the transfer of technology from a developed nation to a developing country, further enabling the latter to improve its production abilities.
• More Job Opportunities: The world of global trade and finance has also helped in the creation of millions of skilled and unskilled jobs worldwide. It has been noted in the past that countries that trade with each other have generated more professional opportunities compared to their non-trading counterparts.

Disadvantages

• Over Dependence: Global trade has led to countries being too dependent on each other. For example, the recent Russia-Ukraine war has led to a worldwide shortage of major commodities from the two countries.
• High Transportation Costs: Logistics costs have been increasing for companies for years now. Some businesses simply cannot afford to import or export. In fact, post the COVID-19 pandemic, logistics costs have grown at a record rate.
• Risk and Uncertainties: COVID-19, 2022 US Port Congestion, Suez Canal Crisis and more. Global trade continues to see major global disruptions and they are exponentially increasing with time.
• Trade Restrictions, Regulations, and Compliance Processes: Government-initiated import, export, and many customs restrictions also serve as a disadvantage to global trade. It’s fairly difficult to manage all the documentation work, currency exchanges, providing the right information, and easily getting remunerated in the global trade market.
• Lack of Visibility and Understanding for International Markets: A lot of businesses do not understand global trade and how global trade data works. They need visibility for global trade and global supply chains. Supply chain intelligence solutions can help them achieve this with the help of import-export data and supply chain analytics.

Top Traded Commodities in Global Trade

We recently studied granular shipment data for the year 2021 with Trademo Intel and found the top traded commodities in the world. Here are our findings:

1. Pharmaceuticals and medicine manufacturing
2. Oil and gas exploration and production
3. Apparel manufacturing
4. Car and automobile manufacturing
5. Global plastic product and packaging manufacturing
6. Auto parts and accessories manufacturing
7. Consumer electronics manufacturing
8. Paper and pulp mills
9. Semiconductor and electronic parts manufacturing
10. Global iron ore mining

Conclusion

International global trade will continue to grow with time. The world economies are still recovering from the aftermath of the coronavirus pandemic and trying to restore the global trade balance.

But, reports and global trade statistics suggest that economies will take some more years to recover and make the trade graph move in a positive direction. If you’re keen on learning more about global trade and staying abreast with what’s happening in the import-export industry, watch this space for more update