We explain what foreign trade is and how this type of trade works. In addition, its differences with international trade.
What is foreign trade?
Foreign trade is the exchange of services or products between two or more countries or economic regions, so that those nations involved can meet their external and internal market needs. Those countries or regions that participate in foreign trade have what is called an open economy.
Foreign trade is regulated by international treaties, agreements, standards and conventions so that, in this way, the exchange process is much simpler.
It generates wealth to the countries, since it implies the entrance of foreign exchange of the country that receives for the good. For example, if Argentina sells something to Brazil, it will receive a certain amount in reals (Brazilian currency) as payment.
How does foreign trade work?
In order for this type of trade to take place, it is important that a country allows foreign goods to enter, commercial freedom must exist and all prohibitions must be eliminated, which does not mean that this trade is not regulated.
There are some countries that decide to close their commercial borders in order to protect the industry itself and thus be able to generate consumption but for local businesses . The problem that this generates is that the things that that country does not possess cannot exist there either. For many countries this type of trade is vital and can become the basis of their economy.
The new technologies also help to make the process of exchanging goods and services more easily , especially the computer and management systems. For example, they allow you to keep track of the containers that are shipped from a country throughout its journey.
There are several theories that explain how foreign trade works .
- There are the so-called traditional theories, which are the model of the absolute advantage of Adam Smith (the author thought that goods were produced where the cost was lower and from there was exported. He also defended a free trade).
- The theory of comparative advantage of David Ricardo (unlike the previous author, for him the most important are the relative costs).
- The Heckscher-Ohlin model (this theory also starts with the previous author, but states that each country produces that good that is more abundant and imports that which is more scarce). This set of theories allowed the countries of open economy to have a greater well-being through it.
- And finally, the new theory of international trade (this theory speaks of the fact that there are failures in the market and that a second “optimal” option must be sought).
Difference between foreign trade and international trade
The difference between foreign trade and international trade is that the latter type incorporates the global transactions of each good into its system . We can put for example oil and its price worldwide, it will change as different events appear that may affect it.
There are countries that do not believe in the benefits of foreign trade, these are those of socialist or communist policies and believe in autarchy. This means that, in addition to the disappearance of this type of trade, that country will be self-sufficient. Beyond this, all countries end up engaging in some type of trade with other countries because it is very difficult for them to subsist on their own or that there is nothing they do not need from another region.