Umit GumustenForeign trade is the exchange of goods and services across international borders and territories; shortly, it is just trade between countries. Let’s break down this exchange definition. When we talk about foreign trade we actually mean two main actions: buy and sell. When a product or service is bought from another country it is import; on the other hand, selling a product or service to another country is export.
Why we export and import
It’s a clear fact that no country is entirely self-sufficient in terms of meeting its technology, food, energy, natural sources and raw material needs. Producing any kind of product requires various materials.
Let’s articulate the subject with a few examples.
- Garment manufacturers require fabric and fabric is made from yarn.
- Smartphone and electric car manufacturers need lithium for batteries.
- Bakers need flour for making bread and other bakery products and flour is made from wheat.
- Almost all the plastic products are made from crude-oil and natural gas.
These examples tell us that every country needs each other to survive and develop. The capitalism followed by mercantilism made the world more globalized and subsequently we have global brands headquartered in one country whose goods are manufactured in other countries, then shipped and sold across the globe.
Today not only global brands but also small businesses are a part of foreign trade. A small chocolate shop can export its products to lots of countries without needing high-volume production. Through technology and digitalisation SMEs can easily reach their potential customers, promote their brands and export their goods to overseas markets, especially due to easy, various and relatively cheap shipping options.
There are a number of reasons such as lack of raw materials, resources, know-how, investment costs; low demand or intellectual property etc. that certain products cannot be manufactured in every country.
Let’s take whiskey for an example. If a famous whiskey brand is in demand in a country and local brands are way far from being an equivalent; there is no reason not to import that brand. This is just for leisure. What about necessary ones like smart phones, computers, cars? As high technology products require big investments, qualified staff, and know-how most countries tend to import them rather than taking the risk of failure.
Another point is of course food and beverage. Just 2 things will be enough to explain the importance of foreign trade: In the modern world we’re living, almost all countries drink coffee and eat bakery products. If it wasn’t for foreign trade, bread and coffee would be nothing but just local delicacies. Ironically, all the biggest coffee brands are from countries that do not grow coffee. And it’s the same situation for bakery and pastry products.
In a nutshell
Why Export
If certain products are produced at cost-effective prices in a country due to labor supply and abundance of resources, that makes the producers ahead of their rivals in the global competition.
Exporting to as many countries as possible will make the exporter spread risks. When the domestic market and/or another country’s economy slows down, other markets that are stable will help the exporter manage the business until they weather the storm.
Exporting makes local producers grow globally. They increase their production skills and vision at international level. Besides, by taking right steps, the more they grow the more their brand reputation improves.
Diversifying markets can help exporters reduce potential problems such as political conflicts with other countries that end up with sanctions, non-tariff barriers, arbitrary treatments or unilateral cancellation of trade agreements.
Exporters make a substantial contribution to the country’s economic growth as they increase foreign currency reserves.
Selling goods to diverse markets increases a company’s profitability and credibility score which provides it stability.
Why Import
Introducing new products to the domestic market makes the importer stand out in the competition.
Availability of multiple choices is always good for consumers. Whoever shows them something new gets their attention. As such domestic producers are forced to make better products in order to compete.
While production of commodities require a number of raw materials, producers buy them from suppliers. However purchasing these raw materials from domestic suppliers could increase the costs a lot. Instead, considering import at low prices will reduce these costs to a desirable level and increase profitability.
