Trade is a transfer of proprietary of goods and services from an individual or a company to another in exchange for cash or cash’s worth. A trader acts as a link between a manufacturer and a buyer. Today, globalization has changed the entire definition of trade. It has taken new dimensions and faces. Companies and organizations are no longer limited by a local market. They have gone global. The purpose of this paper is to analyze the importance of the international trade considering the theories of absolute and comparative advantage, the economical concepts of free trade versus protectionism, and also the impact of the trade on history.
No territory in the world possesses all kinds of resources and products. Therefore, all countries have to depend on each other for meeting the demands of the nation and for the development of its economy. The necessity of a particular country to trade with other countries can be explained by the theories of an absolute and comparative advantage. The theory of an absolute advantage refers to the maximum production of goods using less resources and low costs compared to the other countries. It results in increased efficiency of a country in particular production; thus, a “country could use its excess specialized production to buy other imports than it could have otherwise produced” (XY&Z, 2008). Such lower cost production encourages trade between the nations. However, the comparative advantage theory states that “there are still economic and efficiency gains to be received” from the trade “if a country specializes in not only what it can produce” but in products which it can produce more efficiently and at lower opportunity cost, “regardless of whether other countries can produce those same products even more efficiently” (XY&Z, 2008). Thus, trade with efficient foreign companies increases competition in the market and helps in breaking down domestic monopolies. Such competition encourages new innovations and designs with higher quality and lower prices of goods. Overall, it is beneficial to the consumers. The advantages, such as the faster economical gain, higher employment opportunities, and more consumer income, make nations trade with each other (“Why do countries trade”, n.d.)
While trading at the international market, the countries adopt various economical policies considering nation’s demands and interests. Protectionism refers to the policies, rules, and regulations which put restrictions on imports. By placing barriers in the form of numerous tariffs on import or by placing quota restrictions on import of a particular product, nations protect their domestic growing industries. In contrast, free trade allows nations to trade without any barriers. It results in increased business and availability of quality products at low prices in the market. Free trade encourages transparency and healthy competition. It is beneficial to the developed countries. However, such policy can be harmful for developing countries, because adoption of free trade results into outsourcing, loss of jobs, and diminished wages (Olivia, 2011).
International trade has widely influenced the course of history. In early 15th century, the European merchants started to search for the new trade routes to reach Asia and Africa. Till the 17th century, new territories like America and Australia were discovered while looking for the international trade. Along with exchange of goods and services, immense culture exchange started between Modern Europe and Old civilization of Asia and Africa. It caused the rise of the colonial period in Europe and Asia. In the first half of the 20th century, competition between European countries for the status of global superpower with international trade and economy control led to military conflicts, which resulted into two major world wars. Since the ancient time, trade has dominantly affected the international politics, geography, and culture (“History of Globalization”, 2013).
Today, advanced modes of transportation and effective trade policies have furthered the growth of many multinational trade corporations. In such a way, international trade plays a significant role in development of country’s economy and culture.