Understanding the Trade theories

Introduction

Trading basically means to sell goods in return for exchange of money between two trading partners. Trade developed during the late part of the seventeenth or eighteenth century namely when Vasco da Gama started travelling across different countries. The development of sea routes encouraged the creation of international business. The Portuguese, the Dutch, the English as well as the French started moving to the spice routes where they were expecting to get the spices from the British East India Company. Trade became more popular during the nineteenth century as steam ships moved across the oceans. The perspective of trade developed when the exchange of goods allowed products to be available to the main traders that were not found in their own territories. The spice route to India and the silk route to China travelling mainland Eurasia were illustrations that depicted the need for rare goods not found in Europe.

Later, the new land, America, had developed fast because of immigration there and important trade took place along the Mississippi and the Yukon River. The gold rush boosted trade in America whereas the colonies of the British Empire, the countries under the rule of the French, Dutch and Portuguese had started trading with various countries. Many British colonies exported sugar, tea and other agricultural products to Great Britain. In the early part of the century, came the invention of the aircraft. Air routes were created and trade got a major impetus. Connections among countries flourished and the world became a global village with sophistication in air transport and the development of cargo planes.

On the continent, there had been the development of the railway system and trade among countries on the continent increased substantially. More goods were exchanged among nations. Trade definitely prospered as more sophisticated transport technologies were developed that allowed perishable items to be delivered in quite short time in different places.

International trade among advanced nations

International trade flourished at first among advanced nations simply because the Western world was more advanced and innovative than any other nations in most fields namely education, technology, infrastructure and market. In fact, trade was very well organised since the late nineteenth century on the European and American market. Other countries were either colonies of the Western nations and they were surpassed in this field. Initially, trade was unilateral since colonisers sold the main products to their colonies after purchasing raw materials from them. This condition put them at an absolute advantage earlier and later that changed to comparative advantage.

The direction of the goods traded

Since the early days of trade, commercial activities took place in one direction, that is, intercontinental trade followed by exchange with the United States. Europe represented a market with a rich cultural diversity and high spending compared with the countries of the Third World—a term no more used today and replaced by developing nations or emerging economies. This trend persisted for some time and under globalisation, the unilateral direction looks to have become less fashionable over time although it might be clear to say that huge financial transactions still take place transatlantic.

Importance of Europe and the Americas

The European mainland through its previous past superpowers; England, France, Portugal, Spain or Italy had the possibility of firstly trading among themselves but also consider the United States as an important market. Trade exchanges have influenced the development of the USA as it consistently developed industrial and transportation infrastructure. To this end, the relations looked bilateral. At a certain time in history, during the middle age period, China used to be a dominant power but was surpassed in the Renaissance period by western nations. The diagram above illustrates the variables influencing trade like Europe’s market size advantage, its high spending and consumption, resources and industries that were abundant as well as skilled workforce both in academic and skill terms. In parallel, the USA looked to be a promising destination with resources like oil and gold as well as rapid technological and infrastructure development propelling the new land as an emerging superpower.

Composition of trade in the early 20th century

In the past, trade consisted mainly of the following nations. It is noted that goods were the driving force of international business at the beginning. The thirst for basic commodities was the prominent reason for trading and dependent on what one country could better produce compared to another one. At the same time, consumption commodities depended upon products like oil that produced electricity and energy for the production of goods in new industries. Raw materials for consumption were imported from colonised nations in Africa, South America or Asia where land as a production factor enabled large scale production of commodities like sugar, tea, coffee, palm oil, etc. Coffee, principally grown on mainland Africa grew as the most sought after beverage in the developed world; sugar was used to process foodstuff and produce consumable goods in Europe. Powerful nations had the upper hand in trade by developing expertise through their industries with high-scale production of steel, aluminium and industrial goods. Later on, technological invention allowed the rich nations to trade more abundantly across the world with both production and technological advances.

Volume of goods traded

In the past, the major volume of goods was traded in the European Continent as well as in the United States of America. We must not forget here the importance of communist countries such as the ex-Union of Soviet Socialist Republic, China and many Eastern European countries which consisted of a strong economic market but had a relatively low volume of goods traded with them because of their closed markets. The trade system was hence focused on the economic systems developed by various nations. To a large extent, the capitalist system was more adapted to industrial development and this model favoured western economies to promote liberal trade and achieve prosperity at a much higher pace than closed economies.

The business world today

Trade is in a state of constant change in the modern world. Europe which represented a major marketing power in the past cannot boast being the world’s most important trading player. Though it is accepted that with a population of 350 million inhabitants that the European Union represents a major market force, the other players are playing an important role in the process. This is a perception of economic growth where Europe progresses at an average of 3% annually while emerging economies progress at 6% with China and India having double-digit growth during the past twenty years.

The USA as a major superpower

In this new millennium, we can say that the USA is still the superpower be it in terms of armed forces or trade. Besides, it is one of those countries that has a veto over crucial business matters. Being a superpower, the United States of America remains the world’s most influential player in international trade. It still has the world’s largest financial assets and its dollar is the most important trading currency in the world. Yet, it fears being taken over by China in the next ten years in terms of Gross Domestic Product and since recently, faces a trade war with the new superpower.

The rise of Japan and South-East Asian tigers

The end of the Second World War saw the sudden rise in economic power of Japan as a result of the massive development at industrial level. The building up of Japan resulted in creating the island as one of the major trading superpowers of the world. Japan started investing in the technological sector and produced novelty products such as modern cars, lighter machines, electronic goods as well as electrical appliances. Japan increased its trade power by investing massively in international business and became one of the most successful nations in the world. The popularity of products such as Honda, Toyota, Seiko and many others are here to prove the big trade power that Japan commands nowadays. This means that the direction and volume of trade has stated shifting to the East, especially to Japan and the newly industrialised South-East Asian tigers. The South-East tigers comprise mainly of Singapore, Malaysia, Cambodia, Thailand, Vietnam and the Philippines. Such countries were formerly assisted in their development by Japan and now, they are among the most important trading partners in that part of the world. Nowadays, such countries have developed their infrastructure and stand as thriving business centres of the world.

Emerging markets in world trade

The relationship between world trade and emerging markets looked grim in recent years due to a surge in populism and protectionist policies in Europe and the United States. Trade is widely considered to be the reason that certain economies, who otherwise would have experienced stagnant growth and increased poverty, were able to establish more free economies and a consumer-based middle class.

Not only are these economies important in terms of production of consumer goods for developed countries, but are now increasingly potential markets for such products themselves. If this trend stays true, not only will poverty in these countries continue to decline, but a middle class will emerge and become vibrant markets for products from developed countries, thus benefiting everyone.

Despite what may look like a grim near-term forecast in terms of global trade resulting from political trends in developed countries, history is on the side of greater integration and raising the standard of living for everyone. World trade and emerging markets will continue to be a catalyst spurring growth and reducing poverty across the globe.

Case Study: How emerging markets are transforming global trade

Emerging markets (EM) are transforming global trade patterns. Against a backdrop of growing protectionist policy measures in many developed economies, such countries are, by contrast, actively cultivating and developing their trade partnerships.

Emerging markets now play a more significant part in international trade than at any other point in history. Strong secular growth trends in EM have spurred a monumental supply-side response through innovation, reforms and improved capacity utilisation. At the same time, recent shifts in developed-world trade policy towards a more protectionist stance, have contrasted with the more broadly free-trade outlook of EM countries. This situation puts many EM companies at a distinct advantage to their developed market counterparts and will continue to drive EM growth for many years to come.

As demand and consumption rises in EM, a confluence of supply side reforms, efficiency improvements and innovation has also paved the way for greater export capabilities. In particular, many EM companies have begun to lead the field in areas such as internet technology and e-commerce. Chinese names like e-commerce giant Alibaba and Tencent have built huge footprints domestically (note that in China, US tech giants like Facebook, Amazon and Google are peripheral players in their respective areas of social media, e-commerce and search engines). Meanwhile, other EM tech firms, like colossus chip-maker Taiwan Semiconductor, are central players in global supply chains – providing components for major brands like Apple.

China’s New Silk Road, or ‘One Belt One Road’ (OBOR) initiative is an audacious project that will have major benefits for increasing the ease of trade from China, across Asia and beyond. It is estimated that US$2–4 trillion of capital will be spent across sixty-eight countries to build infrastructure in the form of ports, airports, highways, railways, power generation plants and pipelines. With this kind of transformational improvement in transportation links, it is easy to imagine the potential benefits that will open up for the EM countries and companies whose markets will expand as a result.

More and more, EM countries’ most important import and export partners are other developing nations. China, for example, is by far the top export destination for Brazilian products. While South Africa, India and Russia import more goods from China than any other country. This intra-regional trade is only set to continue with trade blocs, such as the ASEAN Free Trade Area (which includes Thailand, Vietnam, Indonesia, Malaysia, Philippines, Singapore, Myanmar, Cambodia, and Laos) generating considerable internal trade momentum outside trading links with developed markets. The vast majority of import values for the ASEAN region come from its own members as well as China.

Perspective

How international business has been beneficial to emerging economies

International business has played so many important roles in the development of emerging market economies; these are seen in the products and services of these economies found in many developed and developing economies of the world [3]. These roles include:

Provision of additional capital to the emerging market economies—the continues inflow of foreign funds through international trade as foreign direct investment (FDI) to countries helps to makes better investment without stringent measure of savings to invest, thus had enabling countries to grow more rapidly with no given in compensation to current consumption.

Fostered multilateral, bilateral and regional trade agreements. During the past 40 years, governments around the world have entered into a series of multilateral agreement to lower government-imposed barriers to trade. Some of these agreements have been between small groups of countries.

Improvement of economic performance through technological transfer and raise overall incomes of emerging market economies (EME)—countries classified as emerging market have attained improved economic performance as a result of international trade through movement of technology by firms from developed nations to emerging nations.

It helps in marketing of natural endowments—different countries of the world are blessed with different weather, mineral resources and technological knowhow. All these endowments are interchange from one country to another through international trade.

Provision of inputs and raw materials for agricultural and manufactory sectors. With the aid of international trade, agricultural inputs are supplied to both the subsistence and commercial farmers in the emerging countries, which higher numbers of its employees are found. These inputs include fertilisers, insecticides, pesticides, implements, and machinery such as tractors etc.

It enables the developing countries to borrow funds in the international capital market at very low interest rates. This is one of the vital roles played by international trade to the growth and development of emerging market economies of the world.

Points to ponder

For the benefit of emerging economies, international business provides additional capital to the emerging market economies. It fosters multilateral, bilateral and regional trade agreements. International business improves the economic performance through technological transfer. It also provides inputs and raw materials for agricultural and manufactory sectors.

A recent decline in the value of merchandise trade for emerging economies

Developing economies recorded a decline in the value of merchandise trade for the second year in a row, with both exports and imports decreasing by 6 per cent in 2016. A surplus in global supply and a decline in prices for oil products continued to have an impact on the export of fuel products, an important sector for many developing economies. Merchandise exports from least-developed countries (LDCs) decreased by 6 per cent in 2016, resulting in a slight decline in their share of world merchandise exports, which now stands at 0.94 per cent.

Developing economies’ participation in trade in services also slowed in 2016 as exports decreased, largely due to lower transport activity, while services imports stagnated. However, exports of other commercial services, especially in intellectual property-related services and ICT services, continued to expand thanks to developing economies in Asia, which are the leading developing economy exporters. LDCs’ share of world exports of commercial services contracted to 0.7 per cent while their share of world imports fell to 1.4 per cent but the performance of LDCs’ services trade varied across regions. At present, travel within Asia is the driver of international tourism for LDCs and fuels LDCs’ travel earnings.