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What Is International Trade?

International trade is the exchange of goods and services between countries. This type of trade
gives rise to a world economy, in which prices, or supply and demand, affect and are affected by
global events. Political change in Asia, for example, could result in an increase in the cost of
labor, thereby increasing the manufacturing costs for an American sneaker company based in
Malaysia, which would then result in an increase in the price that you have to pay to buy the
tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in
you having to pay less for your new shoes.
Trading globally gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries. Almost every kind of product can be found on the
international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water.
Services are also traded: tourism, banking, consulting and transportation. A product that is sold to
the global market is an export, and a product that is bought from the global market is an import.
Imports and exports are accounted for in a country's current account in the balance of payments.
(For more on this, see the articles What Is The Balance Of Payments? and Understanding The
Current Account In The Balance Of Payments.)
Increased Efficiency of Trading Globally
Global trade allows wealthy countries to use their resources - whether labor, technology or
capital - more efficiently. Because countries are endowed with different assets and natural
resources (land, labor, capital and technology), some countries may produce the same good more
efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently
produce an item, it can obtain the item by trading with another country that can. This is known as
specialization in international trade.
Let's take a simple example. Country A and Country B both produce cotton sweaters and wine.
Country A produces 10 sweaters and six bottles of wine a year while Country B produces six
sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however,
takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine
(total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and
three hours to produce six bottles of wine (total of four hours).
But these two countries realize that they could produce more by focusing on those products with
which they have a comparative advantage. Country A then begins to produce only wine and
Country B produces only cotton sweaters. Each country can now create a specialized output of
20 units per year and trade equal proportions of both products. As such, each country now has
access to 20 units of both products.
We can see then that for both countries, the opportunity cost of producing both products is
greater than the cost of specializing. More specifically, for each country, the opportunity cost of
producing 16 units of both sweaters and wine is 20 units of both products (after trading).
Specialization reduces their opportunity cost and therefore maximizes their efficiency in
acquiring the goods they need. With the greater supply, the price of each product would decrease,
thus giving an advantage to the end consumer as well.

Note that, in the example above, Country B could produce both wine and cotton more efficiently
than Country A (less time). This is called an absolute advantage, and Country B may have it
because of a higher level of technology. However, according to international trade theory, even if
a country has an absolute advantage over another, it can still benefit from specialization. (For a
review of some of these economic concepts, see the Economics Basics tutorial.)
Other Possible Benefits of Trading Globally
International trade not only results in increased efficiency but also allows countries to participate
in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is
the amount of money that individuals invest into foreign companies and other assets. In theory,
economies can therefore grow more efficiently and can more easily become competitive
economic participants.
For the receiving government, FDI is a means by which foreign currency and expertise can enter
the country. These raise employment levels and, theoretically, lead to a growth in the gross
domestic product. For the investor, FDI offers company expansion and growth, which means
higher revenues.
Free Trade vs. Protectionism
As with other theories, there are opposing views. International trade has two contrasting views
regarding the level of control placed on trade: free trade and protectionism. Free trade is the
simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The main idea
is that supply and demand factors, operating on a global scale, will ensure that production
happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth
because market forces will do so automatically.
In contrast, protectionism holds that regulation of international trade is important to ensure that
markets function properly. Advocates of this theory believe that market inefficiencies may
hamper the benefits of international trade and they aim to guide the market accordingly.
Protectionism exists in many different forms, but the most common are tariffs, subsidies and
quotas. These strategies attempt to correct any inefficiency in the international market.
Conclusion
As it opens up the opportunity for specialization and therefore more efficient use of resources,
international trade has potential to maximize a country's capacity to produce and acquire goods.
Opponents of global free trade have argued, however, that international trade still allows for
inefficiencies that leave developing nations compromised. What is certain is that the global
economy is in a state of continual change and, as it develops, so too must all of its participants.
Read more: http://www.investopedia.com/articles/03/112503.asp#ixzz1VPKa9Yx8
International business is a term used to collectively describe all commercial transactions
(private and governmental, sales, investments, logistics,and transportation) that take place
between two or more regions, countries and nations beyond their political boundary. Usually,
private companies undertake such transactions for profit; governments undertake them for profit
and for political reasons.[1] It refers to all those business activities which involves cross border

transactions of goods, services, resources between two or more nations. Transaction of economic
resources include capital, skills, people etc. for international production of physical goods and
services such as finance, banking, insurance, construction etc.
A multinational enterprise (MNE) is a company that has a worldwide approach to markets and
production or one with operations in more than a country. An MNE is often called multinational
corporation (MNC) or transnational company (TNC). Well known MNCs include fast food
companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors,
Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony,
and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations
operate in multiple national markets.
Areas of study within this topic include differences in legal systems, political systems, economic
policy, language, accounting standards, labor standards, living standards, environmental
standards, local culture, corporate culture, foreign exchange market, tariffs, import and export
regulations, trade agreements, climate, education and many more topics. Each of these factors
requires significant changes in how individual business units operate from one country to the
next.

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How to do international trade

Entering the global marketplace
Many small businesses are finding new markets in countries around the world. Exporting is
potentially very profitable, but takes planning and commitment. There is help available to those
businesses interested in exploring this option.
As in every new venture, you need to begin with a plan, in this case an international business
plan. Your plan should include the following parts:
Long term and short term goals
Industry analysis
Analysis of your product and company
Marketing strategy
Select the best countries for your product
Identify customers
Determine export method
Find a distributor or agent
Identify special product concerns such as packaging, labeling, conversion, etc.
Plan delivery methods
Develop pricing strategy
Develop promotion plan
Make customer service decisions including warranties, payment options, etc.
Financial considerations
Sales forecast
Costs of goods (besides material and labor you must consider packing, container
loading, freight, wharfage, handling, terminal charges, courier mail, documentation, consular
legalization, bank documentation, dispatch, bank collection fees, cargo insurance, etc.)
International overhead expenses
Projected income statement
Break-even analysis

Timetable
Action plan
Begin your research into foreign markets by classifying your product. You will need to know the
HS (Harmonized System of Tariff Classification) number, the NAICS (North American Industry
Classification System) and SITC (Standard International Trade Classification) codes.
Next, target your market by finding countries with the best markets for your product(s). Data
may be available from trade associations or from the SBAtlas, The World Factbook, Foreign
Trade Report FT900, the National Trade Data Bank, and other sources. Check your local public
library or business library for those references not available on the Internet.
Once you have narrowed your market to a few countries, you can analyze your market position
in relation to those countries to determine which to pursue.
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International trade is one of the hot industries of the new millennium. But it's not new. Think
Marco Polo. Think the great caravans of the biblical age with their cargoes of silks and spices.
Think even further back to prehistoric man trading shells and salt with distant tribes. Trade exists
because one group or country has a supply of some commodity or merchandise that is in demand
by another. And as the world becomes more and more technologically advanced, as we shift in
subtle and not so subtle ways toward one-world modes of thought, international trade becomes
more and more rewarding, both in terms of profit and personal satisfaction.
Importing is not just for those lone footloose adventurer types who survive by their wits and the
skin of their teeth. It's big business these days--to the tune of an annual $1.2 trillion in goods,
according to the U.S. Department of Commerce. Exporting is just as big. In one year alone,
American companies exported $772 billion in merchandise to more than 150 foreign countries.
Everything from beverages to commodes--and a staggering list of other products you might
never imagine as global merchandise--are fair game for the savvy trader. And these products are
bought, sold, represented and distributed somewhere in the world on a daily basis.
But the import/export field is not the sole purview of the conglomerate corporate trader,
according to the U.S. Department of Commerce, the big guys make up only about 4 percent of all
exporters. Which means that the other 96 percent of exporters--the lion's share are small outfits
like yours wil be--when you're new, at least.
Champagne and Caviar
Why are imports such big business in the United States and around the world? There are lots of
reasons, but the three main ones boil down to:
Availability: There are some things you just can't grow or make in your home country.
Bananas in Alaska, for example, mahogany lumber in Maine, or Ball Park franks in France.
Cachet: A lot of things, like caviar and champagne, pack more cachet, more of an
"image," if they're imported rather than home-grown. Think Scandinavian furniture, German
beer, French perfume, Egyptian cotton. Even when you can make it at home, it all seems classier
when it comes from distant shores.
Price: Some products are cheaper when brought in from out of the country. Korean toys,
Taiwanese electronics and Mexican clothing, to rattle off a few, can often be manufactured or
assembled in foreign factories for far less money than if they were made on the domestic front.
Aside from cachet items, countries typically export goods and services that they can produce
inexpensively and import those that are produced more efficiently somewhere else. What makes
one product less expensive for a nation to manufacture than another? Two factors: resources and

technology. A country with extensive oil resources and the technology of a refinery, for example,
will export oil but may need to import clothing.
Types of Import/Export Businesses
First off, let's take a look at the players. While you've got your importers and your exporters,
there are many variations on the main theme:
Export management company (EMC): An EMC handles export operations for a
domestic company that wants to sell its product overseas but doesn't know how (and perhaps
doesn't want to know how). The EMC does it all--hiring dealers, distributors and representatives;
handling advertising, marketing and promotions; overseeing marking and packaging; arranging
shipping; and sometimes arranging financing. In some cases, the EMC even takes title to the
goods, in essence becoming its own distributor. EMCs usually specialize by product, foreign
market or both, and--unless they've taken title--are paid by commission, salary or retainer plus
commission.
Export trading company (ETC): While an EMC has merchandise to sell and is using its
energies to seek out buyers, an ETC attacks the other side of the trading coin. It identifies what
foreign buyers want to spend their money on and then hunts down domestic sources willing to
export. An ETC sometimes takes title to the goods and sometimes works on a commission basis.
Import/export merchant: This international entrepreneur is a sort of free agent. He has
no specific client base, and he doesn't specialize in any one industry or line of products. Instead,
he purchases goods directly from a domestic or foreign manufacturer and then packs, ships and
resells the goods on his own. This means, of course, that unlike the EMC, he assumes all the
risks (as well as all the profits).
Swimming the Trade Channel
Now that you're familiar with the players, you'll need to take a swim in the trade channel, the
means by which the merchandise travels from manufacturer to end user. A manufacturer who
uses a middleman who resells to the consumer is paddling around in a three-level channel of
distribution. The middleman can be a merchant who purchases the goods and then resells them,
or he can be an agent who acts as a broker but doesn't take title to the stuff.
Who your fellow swimmers are will depend on how you configure your trade channel, but they
could include any of the following:
Manufacturer's representative: a salesperson who specializes in a type of product or
line of complementary products; for example, home electronics: televisions, radios, CD players
and sound systems. He often provides additional product assistance, such as warehousing and
technical service.
Distributor or wholesale distributor: a company that buys the product you've imported
and sells it to a retailer or other agent for further distribution until it gets to the end user
Representative: a savvy salesperson who pitches your product to wholesale or retail
buyers, then passes the sale on to you; differs from a manufacturer's representative in that he
doesn't necessarily specialize in a particular product or group of products
Retailer: the tail end of the trade channel where the merchandise smacks into the
consumer; as yet another variation on a theme, if the end user is not Joan Q. Public but an
original equipment manufacturer (OEM), then you don't need to worry about the retailer because
the OEM becomes your end of the line. (Think Dell Computer purchasing a software program to
pass along to its personal computer buyer as part of the goodie package.)

The Right Stuff

Not everybody is cut out to be an international trader. This is not, for example, a career for the
sales-phobic. If you're one of those people who would rather work on a chain gang than sell Girl
Scout cookies, or if you blanch at the thought of making a sales pitch, then you don't want to be
in import/export. This is also not a career for the organizationally challenged. If you're one of
those let-the-devil-handle-the-details types whose idea of follow-up is waiting to see what
happens next, you should think twice about international trading.
If, on the other hand, you're an enthusiastic salesperson, a dynamo at tracking things like
invoices and shipping receipts, and your idea of heaven is seeing where new ideas and new
products will take you, and if, to top it off, you love the excitement of dealing with people from
different cultures, then this is the career for you.
It also helps if you already have a background in import/export. Most of the traders we talked
with were well-versed in the industry before launching their own businesses. Peter P., who
founded a Russian trading company, segued directly from his college major in international
business to an operations position with an international frozen-meat trading company in Atlanta,
which landed him in the right place at the right time.
"I speak both Russian and Ukrainian fluently," Peter says. "I'm of Ukrainian descent. I took
Russian as a minor in college, initially as an easy grade. Little did I know when I graduated back
in '89 that Russia would open up to the West shortly thereafter."
The Trade Hit Parade
According to the U.S. Census Bureau, the top 10 countries with which America trades (in order
of largest import and export dollars to smallest) are:
Canada

Germany

Republic of Korea
Mexico

United Kingdom
(South Korea)
Japan

France

Taiwan
China

Singapore
You needn't, of course, confine yourself to trade deals with importers and exporters in these
countries--there are scads of other intriguing possibilities available, including the member
countries of the Caribbean Basin and Andean pacts and the new kids on the Eastern Bloc, the
former Soviet Union countries. But as a newbie on the international scene, you should
familiarize yourself with our biggest trading partners and see what they have to offer. Then take
your best shot, with them or with another country.
20 Factors to Consider Before Going Global
Before you set one foot on another shore, read these tips from an international business
expert to improve your chances of global success.
Never in the history of the world has the entrepreneurial spirit-the spirit of adventure-been more
alive or in a more favorable position to reach out to the world for business. International trade
increases sales and profits, enhances a company's prestige, creates jobs, and offers a valuable
way for business owners to level seasonal fluctuations. But one thing gets tricky: what factors to
consider or develop before going global.
As with any new business plan, the first step you should take before crossing borders is to do
your homework. Take these 20 critical factors into account before you begin:

Factor 1: Get company-wide commitment. Every employee should be a vital member of your
international team, from the executive suite to customer service through engineering, purchasing,
production and shipping. You're all in it for the long haul.
Factor 2: Define your business plan for accessing global markets. An international business
plan is important in order to define your company's present status and internal goals and
commitment, but it's also necessary if you plan to measure your results.
Factor 3: Determine how much you can afford to invest in your international expansion
efforts. Will it be based on ten percent of your domestic business profits or on a pay-as-you-canafford process?
Factor 4: Plan at least a two-year lead-time for world market penetration. It takes time and
patience to build a great, enduring global enterprise, so be patient and plan for the long haul.
Factor 5: Build a website and implement your international plan sensibly. Many companies
offer affordable packages for building a website, but you must decide in what language you'll
communicate. English is unarguably the most important language in the world, but only 28
percent of the European population can read it. That percentage is even lower in South America
and Asia. Over time, it would be best to slowly build a site that communicates sensibly and
effectively with the world.
Factor 6: Pick a product or service to take overseas. You can't be all things to all people.
Decide on something. Then stick with it.
Factor 7: Conduct market research to identify your prime target markets. You want to find
out where in the world your product will be in greatest demand. Market research is a powerful
tool for exploring and identifying the fastest-growing, most penetrable market for your product.
Factor 8: Search out the data you need to predict how your product will sell in a specific
geographic location. Do you want to sell a few units to a customer in Australia or ten 40-foot
containers on a monthly basis to retailers in France? Doing your homework will enable you to
find out how much you'll be able to sell over a specific period of time.
Factor 9: Prepare your product for export. You should expect to adapt your product to some
degree for sale outside your domestic markets before you make your first sale. Packaging plays a
vital role in enabling international connections. Make yours the best in its class, and you'll be
able to sell it anywhere in the world.
Factor 10: Find cross-border customers. There is no business overseas for you unless you can
locate customers first.
Factor 11: Establish a direct or indirect method of export. It all boils down to export strategy
and how much control you wish to exercise over your ventures. On the other hand, readiness to
seize an opportunity is more important than having your whole strategy nailed down beforehand.
Factor 12: Hire a good lawyer, a savvy banker, a knowledgeable accountant and a seasoned
transport specialist, each of whom specializes in international transactions. You may feel you
can't afford these professional services, but you really can't afford to do without them.
Factor 13: Prepare pricing and determine your landed costs. Be ready to test out your price
on your customer. See what reaction you get and then negotiate from there.
Factor 14: Set up terms, conditions and other financing options. Agree on terms of payment
in advance, and never, ever sell on open account to a brand new customer. No ifs, ands or buts.
Just don't.

Factor 15: Brush up on your documentation and export licensing procedures. If you find it
too time consuming, hire a freight forwarder who can fill you in on the spot. Ask a lot of
questions. Use their expertise to your advantage.
Factor 16: Implement an extraordinary after-sales service plan. The relationship between
your company and your overseas customer shouldn't end when a sales is made. If anything, it
should be just the start of a long relationship which requires more of your attention. The "care
and feeding" of your customers will determine if they keep coming back for more.
Factor 17: Make personal contact with your new targets, armed with culture-specific
information and courtesies, professionalism and consistency. Your goal should be to enter a
different culture, adapt to it and make it your own.
Factor 18: Investigate international business travel tips. The practical aspects of international
business can make or break the success of your trip. In preparing to go boldly where you've
never gone before, plan accordingly.
Factor 19: Explore cross-border alliances and partnerships. In charting your global strategy,
consider joining forces with another company of similar size and market presence that's located
in a foreign country where you're already doing business, or would like to. Gauge your
readiness-or willingness-to take on a 50/50 partnership and what it can and cannot do for you.
Factor 20: Enjoy the journey. Never forget that you are the most important and valuable
business asset you have, and that the human touch is even more precious in our age of advanced
technology. Take the best possible care of yourself, your employees, your suppliers and your
customers, and your future will be bright, prosperous and happy.
Going global doesn't have to be a scary proposition. By considering and developing these twenty
essential factors before going global, your organization can realize the full potential of
globalization and capture dramatic revenue growth.
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How to be global
A few weeks ago I pointed out how to ready your website for international business
everything from translating your website text, to search engine optimization in other languages.
That article sparked thoughtful discussion. So this week I thought Id expand the discussion
beyond your Web presence, and focus on how to prepare your business as a whole to go global.
Depending on the industry you are in, and where you intend to seek business, here are 5
considerations before you take that big leap:
1) Dont assume you have to be big to go global A few years back the Council on
Competitiveness coined the term micro-multinational to describe startups that go global from
day one (or nearly day one). In fact, weve published an entire series on micro-multinational
companies. So rather than following the old-fashioned path to global growth, which meant
expanding regionally, then nationally before finally going international years later today you
can leapfrog over those steps. Its largely thanks to inexpensive technology and services
designed to help small businesses operate across borders with the same efficiencies as large
businesses.
2) Research the legal, HR and tax environment in any countries where you will have a
physical presence, before you leap If you need or plan to have a presence in or ongoing
sales to another country such as local employees, local warehouses or exports of goods to that
country be sure to investigate all legal, HR and tax implications. They can add considerable

cost to doing business, not to mention getting your business into hot water if you dont comply
with local laws and regulations. Thats a distraction you dont need!
Previously, I interviewed Larry Harding of High Street Partners, a company that helps small
businesses navigate the compliance issues of doing business internationally:
According to CEO Larry Harding, a handful of issues come up repeatedly when companies
desire to expand overseas. Its easy to do the things that are readily apparent, but below the
surface there are so many more things to look out for. It behooves companies that are in the
planning stages of international expansion, to factor in the costs of compliance. He pointed to
these two typical pitfalls as examples:
Employment Regulations and Practices These are very different overseas. A typical
pitfall might involve a company sending its U.S. offer letter to a prospective employee in the
European Union, without realizing that they really need a full-blown employment contract that
complies with local regulations. The ramification is that it immediately tilts the balance of power
greatly to the employee, at the expense of the company, and makes termination difficult.
Shipping and Importation Many U.S. companies dont have a good handle on
shipping product overseas. There are a complex set of rules about importation and logistical
issues. A typical pitfall is that something arrives on the dock and a duty must be paid. The
company shipping ends up paying and it can be sizable sometimes 17% eating up the
profits.
3) Invest in technology from the get-go The right technology, especially cloud based
software, can position your business to scale without adding incremental cost or a large staff
base. Web-based software services, email, social media and inexpensive telecommunications
bring the world to your fingertips, helping bridge wide distances. And just as importantly,
technology can make the job of gathering market intelligence and marketing your business
internationally, much easier.
Laurel Delaney, CEO of GlobeTrade.com, noted the importance of social media and the Web in a
recent article about small businesses considering international expansion. Laurel wrote:
How else will cross-border customers find you? If you are still thinking about whether your
business should launch a blog or be on Twitter, forget the notion of taking your business global.
You are too myopic! You need to position yourself on relevant networks and beef up your
communication efforts. So for all you aspiring global enthusiasts, pony up the nominal fee to set
up a regular website, start a blog, and get on Twitter, Facebook and LinkedIn. Use effective
marketing to get noticed. The more online platforms you use, the better your chances of being
discovered. When a customer bites, test out your price, see what reaction you get and then
negotiate from there.
If you offer products on an e-commerce platform, can customers buy at every destination
point? Make sure you focus on customer support, fulfillment and being user friendly.
Accessibility is paramount considering all the different time zones we operate in. Make it easy
for customers to get help should they need it. Your site should be attractive and functional.
Speed is also important when considering users in remote parts of the world with dial-up
connections. Do what you can to help them buy from you without a hassle.
4 ) If you plan to export physical goods, get exporting help There are many considerations
tied up in the decision to export. You have to understand your market in the country you are
targeting. You have to understand exporting laws and regulations, both here in the United States
and in the target country. Sometimes licenses are required. The U.S. Federal government has
done a good job on a website to provide you answers to these and many more questions. On

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Export.gov you can: take advantage of international market research; learn about trade missions
and trade events; begin your investigation into export licensing requirements; and even get
personalized answers to your exporting questions via email and phone.
5) Figure out how youre going to get paid Doing business internationally used to rely
heavily on letters of credit. Letters of credit are still widely used. But luckily today there are
easier and faster options, especially for smaller-ticket transactions. PayPal and American
Expresss FX International are two of the most popular options for international payments.
Moneybookers.com, Xoom.com and even Western Union are lesser-used alternatives, but still
may fit in situations where PayPal or FX International are not available, or as an alternative. For
instance, while PayPal covers many countries, your buyer may not have access to PayPal in the
country you are selling into, but one of the other alternatives may fit the bill. Decide up front
your desired method(s) of payment, and know the ins and outs so that you arent rudely (or
expensively) surprised.
These are but a handful of the issues to consider when going global. For additional insights,
read:
The Hidden Challenges Lurking in Global Business (John Jantschs interview of two
entrepreneurs and their challenges going global).
Start and Run a Profitable Exporting Business (the entire book is now available free of charge on
Google Books)
Managing Methods of Payments on Export Sales (again we turn to Laurel Delaney of
GlobeTrade for her expertise)