We explain what foreign trade is and how this type of trade works. Also, its differences with international trade.
What is Foreign Trade?
Foreign trade is exchange of services or products between two or more countries or economic regions, so that those nations involved can cover their external and internal market needs. Those countries or regions that participate in foreign trade have what is called an open economy.
foreign trade It is regulated by treaties, agreements, norms and agreements international so that, in this way, the exchange process is much simpler.
It generates wealth for countries, since it implies the income of foreign currency from the country that receives for the good. For example, if Argentina sells something to Brazil, it will receive a certain amount in reais (Brazilian currency) as payment.
See also: Free Trade Agreement
How does foreign trade work?
For this type of trade to occur, it is important that a country allow the entry of foreign goods, Commercial freedom must exist and all prohibitions in this regard must be eliminated, which does not mean that this trade is not regulated.
There are some countries that decide close your trade borders in order to protect the industry itself and in this way be able to generate consumption but for local companies. The problem that this generates is that the things that that country does not have will not be able to exist there either. For many countries this type of trade is vital and can become the basis of their economy.
New technologies also help make the process of exchanging goods and services easier, especially computer and management systems. For example, they allow you to track containers sent from a country throughout their journey.
There are several theories that explain how foreign trade works.:
- There are the so-called traditional theories, which are Adam Smith's model of absolute advantage (the author thought that goods were produced where the cost was lowest and from there they were exported. He also defended free trade).
- David Ricardo's theory of comparative advantage (unlike the previous author, for him the most important thing is relative costs).
- The Heckscher-Ohlin model (this theory is also based on the previous author, but states that each country produces that good that is most abundant and imports that which is most scarce). This set of theories allowed open economy countries to have greater well-being through it.
- And finally, the new theory of international trade (This theory says that there are failures in the market and that we must look for a second “optimal” option).
Difference between foreign trade and international trade
The difference between foreign trade and international trade is that This last type incorporates global transactions for each good into its system. We can take, for example, oil and its price worldwide, this 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 with socialist or communist policies and believe in autarky. 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 there is nothing that they do not need from another region.
Continue in: International trade
