This article is authored by Dr Chithra Suresh, Senior Faculty at the Bahrain Institute of Banking and Finance (BIBF).
This is the first part of a series covering various aspects of international trade and financing. Subsequent guides will discuss other important topics including trade documents, trade financing, trade regulations, digitalisation, and supply chain financing.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the ICC Academy or ICC.
An introduction to international trade
Domestic and international trade both play pivotal roles in the economic development of nations, but they entail different sets of risks and complexities. Understanding these differences is essential for businesses, especially exporters and importers to navigate effectively in the global marketplace while managing associated risks.
Key points to consider:
- Imagine your country didn't participate in international trade. It could only rely on what it produces domestically to meet its needs. How would this limited access impact the economy and people's lives?
- Think of the world as a giant supermarket. Each country brings its specialties to the shelves. What unique products or services does your country "sell" to the world?
- Consider a scenario where your country faces a sanction, restricting the movement of people and goods in and out of the country. How might this constraint on international trade affect both businesses and consumers within the country?
Domestic trade vs international trade
Domestic trade refers to the buying and selling of goods and services within the borders of a country, involving transactions between individuals, businesses, and governments. International trade involves the exchange of goods and services across national borders, encompassing imports, exports, and foreign direct investment (FDI).
A classic example of international trade is the import of electronics from Japan by companies in the United States. In this scenario, Japanese firms manufacture electronic goods and sell them to American consumers, showcasing a clear flow of trade between two nations.
Both domestic and international trade play vital roles in every country’s economy, but they come with distinct features and risk profiles. Here's a comparative analysis:
Features of domestic trade
- Market: Limited to domestic country's borders, catering to the domestic population.
- Regulations: Simpler regulations compared to international trade.
- Transactions: Primarily conducted in domestic currency
- Risks: Primarily competition from other domestic businesses and economic fluctuations within the country.
Features of international trade
- Market: Global or regional depending on agreements e.g., United States, Gulf Cooperation Council (GCC), Greater Arab Free Trade Area (GAFTA).
- Regulations: Complex regulations involving customs procedures, quotas, and varying currencies.
- Transactions: Often involve multiple currencies and foreign exchange risks.
- Risks: International trade involves a variety of risks that can impact businesses, including currency fluctuations, political instability, and regulatory changes. Understanding and managing these risks is crucial for companies engaged in global commerce to ensure smooth operations and protect their financial interests.
- Political instability: Unrest in trading partner countries can disrupt trade flows.
- Currency fluctuations: Changes in exchange rates can impact profit margins.
- Logistics challenges: Delays and disruptions in international shipping can increase costs and delivery times.
- Compliance risks: Ensuring adherence to international trade regulations can be complex.
- Customs, practices, and language differences: Can present significant obstacles in international trade. Variations in customs and practices can hinder understanding the requirements of others. Language barriers can lead to communication delays or misunderstandings, resulting in increased costs.
- Financial crime: International trade can be a vehicle for money laundering and fraud
- Geo-political: These can greatly impact international trade flows by driving up costs, disrupting supply chains, and limiting access to various markets. Such situations make it difficult for businesses to navigate the complexities of global trade environments.
Why do businesses go global despite the risks?
Advantages of international trade
In today's interconnected world, businesses face a choice: embrace international trade or risk falling behind. International trade, while offering numerous economic benefits, is not without its risks. Despite these challenges, businesses and countries continue to engage in international trade. Let's delve into the advantages of international trade to understand why it remains a cornerstone of the global economy.
- Meet diverse consumer demands: International trade helps businesses source raw materials, components, and finished goods globally, ensuring they can efficiently meet customer needs. This flexibility allows companies to stay competitive and avoid production disruptions. Importing also allows them to offer products consumers desire, even if domestic production isn't feasible or cost-effective.
- Reach new markets and grow revenue: International trade opens doors to new customer bases beyond a company's home market. This can be particularly beneficial if domestic demand is limited. However, with the rise of global competition, some companies are strategically shifting production closer to home (reshoring/nearshoring) due to political or economic concerns.
- Leverage comparative advantages: Engaging in international trade allows businesses to capitalise on their strengths, like lower production costs or specific expertise. This benefits all parties involved, as consumers gain access to a wider range of goods and services at potentially lower prices.
- Lower costs through economies of scale: Producing in larger quantities can reduce the cost per unit, as fixed costs are spread over a greater number of units. This reduction in production costs can lead to lower prices for consumers and higher profit margins for businesses. For example, Samsung Electronics can produce smartphones at a lower cost per unit by manufacturing them in large quantities. This efficiency helps Samsung remain competitive in the global market.
- Competitive advantage of importing and exporting services in global trade: By engaging in cross border exchange of services such as consulting, financial services, information technology, and tourism, countries can diversify their economic activities beyond the exchange of physical goods. By embracing the trade of services countries can enhance their economic competitiveness, create job opportunities, and foster growth.
Strategic benefits
- Diversification of markets and sources: Engaging in international trade allows businesses to diversify their markets and sources of raw materials. This diversification reduces dependency on a single market or source, mitigating risks associated with market fluctuations and supply chain disruptions. For example, a company that sources raw materials from multiple countries is less affected by disruptions in any one country. If a natural disaster affects the supply chain in one region, the company can rely on alternative sources from other regions.
- Enhanced competitiveness: Exposure to international markets drives businesses to innovate and improve their products and processes. Competing globally forces companies to adopt best practices and invest in research and development. For example, Toyota Motor Corporation's global presence has pushed it to continually innovate and improve its vehicles. This commitment to excellence has made Toyota one of the leading automobile manufacturers in the world.
In essence, international trade offers a pathway for businesses to thrive in a globalised economy, despite the complexities involved. Ultimately, it allows for a more diverse and accessible selection of goods and services for businesses and consumers worldwide.
In recent years, global trade has faced hurdles due to geopolitics, nationalism, and the COVID-19 pandemic. Concerns about sustainability and labour costs have led to more production moving closer to home. Still, exporting remains vital for many economies, fostering growth and international business ties.
Many of the hindrances in international trade faced by exporters and importers can be mitigated through a clear understanding of Incoterms® 2020 Rules. These standardised terms outline the costs, risks and responsibilities of the parties involved in international trade, providing a framework for smoother transactions.
Who are the key players in international trade?
Several key players drive international trade, each contributing to the smooth functioning of global commerce. Understanding their roles helps in appreciating the complexity and interdependence of international trade.
- Governments: Governments establish trade policies, negotiate trade agreements, and regulate imports and exports. They play a crucial role in creating a conducive environment for international trade through policies and agreements. For example, the US government negotiates trade agreements like the United States-Mexico-Canada Agreement (USMCA), which facilitates trade between the three countries by reducing tariffs and streamlining regulations.
- Private sector: Private companies drive significant volumes of international trade through production, sourcing, and distribution across multiple countries. They leverage global supply chains to optimise production and reduce costs. For example, Coca-Cola operates in over 200 countries, producing and distributing beverages worldwide. Its extensive global presence makes it a key player in international trade.
- Small and medium sized enterprises: International trade is not exclusively the domain of large companies; it also provides opportunities for small and medium-sized enterprises (SMEs) to expand their reach and contribute to economic growth. SMEs play a crucial role in international trade through their exports and job creation. Their agility allows them to adapt quickly to changing market conditions, making them valuable players in global supply chains.
- Financial institutions: Financial institutions provide trade finance services such as letters of credit, letters of guarantees, supply chain finance solutions, and other financing facilities. These services are essential for mitigating the risks associated with international trade and ensuring smooth transactions. In addition to banks, many fintechs have also entered the space, posing tough competition to banks. For example, HSBC offers trade finance services, helping businesses manage risks and secure financing for their international trade activities.
- International organisations: International organisations set standards, provide trade-related data and research, and facilitate dispute resolution. They play a vital role in promoting fair and efficient global trade. For example, the International Chamber of Commerce has set the rules and standards that govern international trade and commerce for the last 100 years, such as the Incoterms® 2020 and universally accepted trade finance rules that ensures access to finance and a level playing field. It also supports the continuity of global trade by being the world’s most trusted provider of dispute resolution services, promoting access to justice, integrity and the rule of law to enable business to promote peace, prosperity and opportunity for all.
- Trade associations and chambers of commerce: These organisations represent the interests of businesses involved in international trade, provide networking opportunities, and advocate for favourable trade policies. For example, the International Chamber of Commerce (ICC) promotes international trade and investment, representing businesses of all sizes globally through its national committees that in turn represent the views of businesses in their country. The ICC World Chambers Federation connects chambers across borders, creating a better environment for business and MSMEs, driving prosperity and opportunity for all.
- Logistics and transportation providers: Logistics and transportation providers facilitate the movement of goods across borders, ensuring timely and efficient delivery. For example, provides global logistics services, helping businesses transport goods to international markets. Read our introductory guide to international logistics here.
What role do international organisations play in international trade?
International organisations play a crucial role in facilitating global trade. The International Chamber of Commerce (ICC) and the World Trade Organization (WTO) are particularly noteworthy for their significant contributions to this field.
World Trade Organisation (WTO)
The World Trade Organisation (WTO), established in 1995 as the successor to the General Agreement on Tariffs and Trade, boasts 166 member nations as of 30 August 2024 and has concluded 16 multilateral agreements binding on all its members (WTO, 2021).
The WTO facilitates global trade by providing a framework for negotiation, establishing rules, and resolving disputes to enhance fairness and predictability in international commerce. Rather than primarily focusing on negotiation alone, the WTO operates based on three equally important functions: negotiation, dispute settlement, and monitoring and deliberation.
It serves as a venue for crafting agreements aimed at dismantling trade barriers and fostering equitable conditions for all parties, thereby fostering global economic growth and development. Additionally, the WTO furnishes a legal and institutional framework for implementing, monitoring, and resolving disputes arising from the interpretation and application of these agreements (WTO, 2021).
One notable agreement, the Trade Facilitation Agreement, entered into force in 2017 after being ratified by two-thirds of WTO members. This pact includes provisions for streamlining the movement, release, and clearance of goods, encompassing those in transit, as well as fostering cooperation among customs and relevant authorities on issues of trade facilitation and customs compliance (WTO, 2018).
However, the world has witnessed a surge in barriers to open trade, exemplified by the ongoing trade tensions between the world's two largest economies, China and the USA. This protracted tariff dispute has led to a proliferation of trade barriers globally, with both nations imposing tariffs on billions of dollars' worth of each other's goods. Get more information about WTO here.
International Chamber of Commerce (ICC)
The International Chamber of Commerce (ICC), established in 1919, has evolved into a global network encompassing over 45 million companies, chambers of commerce, and business associations spanning more than 170 countries. It advocates for a level playing field in international commerce through global standards, effective dispute resolution, and strong business advocacy. The ICC supports businesses of all sizes, fostering inclusivity and promoting leadership across industries.
At its core, the ICC serves as the preeminent voice of global enterprise, championing open international trade and investment while assisting businesses in navigating the challenges and opportunities of globalisation. Originating from a vision of promoting trade as a catalyst for peace and prosperity, the ICC, often referred to as "the merchants of peace," endeavours to foster a conducive environment for global commerce (ICC).
ICC's activities revolve around three pillars: rule setting, dispute resolution, and policy advocacy. Leveraging the expertise of its diverse membership engaged in international business, the ICC exercises unparalleled authority in crafting rules governing cross-border transactions. While many of these rules are voluntary, they are widely adhered to in numerous daily transactions, shaping the landscape of international trade.
Moreover, ICC provides vital services such as the ICC International Court of Arbitration, a premier arbitral institution. Drawing upon the expertise of business leaders and experts from its membership, ICC formulates positions on a broad array of trade and investment policies, as well as technical subjects including banking practices, digital economy regulations, environmental sustainability, and intellectual property rights, among others.
ICC collaborates closely with international organizations such as the United Nations where it holds the Observer Status, the World Trade Organization (WTO), and intergovernmental forums like the G20 to advocate for policies conducive to global economic development and cooperation. Get more information about ICC here.
Further learning
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About the author
Dr Chithra Suresh
Senior Faculty, Bahrain Institute of Banking and Finance (BIBF)
Dr. Chithra Suresh is a Senior Faculty member at the Bahrain Institute of Banking and Finance (BIBF) with a Ph.D. in Economics and 22 years of experience in curriculum design, training, and tutoring across the Gulf region. Specializing in Macro and Microeconomics, International Economics, Quantitative Methods, and Trade Finance, she has successfully trained bankers in LIBF certifications (CITF, CDCS, CSCF) and GARP risk qualifications.