Global Trading

Details

Category: Trading Type

Global trade is exchange of capital, goods, and services across global borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While global trade has been present throughout much of history (see Silk Road, Amber Road), it’s economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the global trade system. Increasing global trade is crucial to the continuance of globalization. Without global trade, nations would be limited to the goods and services produced within their own borders.

Global trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that global trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and global trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus global trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production.

Instead of importing a factor of production, a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. Global trade is also a branch of economics, which, together with global finance, forms the larger branch of global economics. Companies doing business across global borders face many of the same risks as would normally be evident in strictly domestic transactions. For example, Buyer insolvency (purchaser cannot pay); Non-acceptance (buyer rejects goods as different from the agreed upon specifications); Credit risk (allowing the buyer to take possession of goods prior to payment); Regulatory risk (e.g., a change in rules that prevents the transaction); Intervention (governmental action to prevent a transaction being completed); Political risk (change in leadership interfering with transactions or prices); and War and other uncontrollable events.