What is foreign trade?

Foreign trade is the exchange of goods and services between economies. Sales abroad are exports; purchases from abroad are imports. Trade includes raw materials, machinery, intermediate products and services, not only final consumer goods.

Why do countries trade?

1. Specialization and comparative advantage Countries differ in resources, skills, technology and production conditions. Comparative advantage concerns a relatively lower opportunity cost of producing a good. Even when one country is absolutely more productive in every good, trade gains may still be possible. 2. Scale, variety and inputs Producing for a larger market may reduce some costs and offer consumers more variety. Imported machinery or inputs can improve domestic productivity. Excessive dependence on one product or country can, however, create risks during supply disruptions. 3. Global value chains Design, components and assembly can occur in different countries. Gross exports can include the value of imported inputs. Treating all export receipts as domestic value added or net profit is therefore incorrect.

Trade policy and social effects

4. The trade balance The difference between goods exports and imports is the merchandise trade balance. Including services and income flows leads to the broader current account. A trade deficit alone cannot describe the economy’s overall performance or competitiveness. 5. Tariffs and other measures Tariffs, quotas, standards and agreements affect trading conditions. A measure protecting some producers may raise consumer or input costs. Health and safety standards need not share the purpose of measures designed solely to restrict trade. 6. Distribution of gains Trade can generate aggregate gains, but benefits and adjustment costs are not shared equally. Some sectors may lose jobs. Training, transition assistance, competition policy and supply diversification are important complementary considerations.