Foreign Trade

Foreign Trade

Foreign Trade Definition

Foreign Trade is the exchange of goods and services between nations. Goods can be defined as finished products, as intermediate goods used in producing other goods, or as agricultural products and foodstuffs.


International trade enables a nation to specialize in those goods it can produce most cheaply and efficiently. Trade also enables a country to consume more than it would be able to produce if it depended only on its own resources. Finally, trade enlarges the potential market for the goods of a particular economy. Trade has always been the major force behind the economic relations among nations.

Advantages of Foreign Trade

Economic benefits result when countries trade with one another. International trade leads to more efficient and increased world production, thus allowing countries (and individuals) to consume a larger and more diverse bundle of goods. A nation possessing limited natural resources is able to produce and consume more than it otherwise could. As noted earlier, the establishment of international trade expands the number of potential markets in which a country can sell its goods. The increased international demand for goods translates into greater production and more extensive use of raw materials and labor, which in turn leads to growth in domestic employment. Competition from international trade can also force domestic firms to become more efficient through modernization and innovation.

Within each economy, the importance of foreign trade varies. Some nations export only to expand their domestic market or to aid economically depressed sectors within the home economy. Other nations depend on trade for a large part of their national income and to supply goods for domestic consumption. In recent years foreign trade has also been viewed as a means to promote growth within a nation’s economy. Developing countries and international organizations have increasingly emphasized such trade.

Government Restrictions

Because foreign trade is such an integral part of a nation’s economy, governmental restrictions are sometimes necessary to protect what are regarded as national interests. Government action may occur in response to the trade policies of other countries, or it may be resorted to in order to protect specific industries. Since the beginnings of international trade, nations have striven to achieve and maintain a favorable balance of trade—that is, to export more than they import.

In a money economy, goods are not merely bartered for other goods. Instead, products are bought and sold in the international market with national currencies. In an effort to improve its balance of international payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a country may attempt to limit imports. Such a policy aims to control the amount of currency that leaves the country.

Import Quotas

One method of limiting imports is simply to close the ports of entry into a country. More commonly, maximum allowable import quantities may be set for specific products. Such quantity restrictions are known as quotas. These may also be used to limit the amount of foreign or domestic currency that is permitted to cross national borders. Quotas are imposed as the quickest means to stop or even reverse a negative trend in a country’s balance of payments. They are also used as the most effective means of protecting domestic industry from foreign competition.


Another common way of restricting imports is by imposing tariffs, or taxes on imported goods. A tariff, paid by the buyer of the imported product, makes the price higher for that item in the country that imported it. The higher price reduces consumer demand and thus effectively restricts the import. The taxes collected on the imported goods also increase revenues for the nation’s government. Furthermore, tariffs serve as a subsidy to domestic producers of the items taxed because the higher price that results from a tariff encourages the competing domestic industry to expand production.

Nontariff Barriers to Trade

In recent years the use of nontariff barriers to trade has increased. Although these barriers are not necessarily administered by a government with the intention of regulating trade, they nevertheless have that result. Such nontariff barriers include government health and safety regulations, business codes of conduct, and domestic tax policies. Direct government support of various domestic industries is also viewed as a nontariff barrier to trade, because such support puts the aided industries at an unfair advantage among trading nations.

20th-Century Trends

In the first half of the 20th century, equal tariffs for similar goods was not the policy of all nations. Countries levied differential tariffs (charging lower tariffs to favored nations) and established other restrictive trading practices as weapons to fight unfriendly nations. Trade policy became the source of many international economic disputes, and trade was severely affected during times of war.

Trade Negotiations

Attempts were first made in the 1930s to coordinate international trade policy. At first countries negotiated bilateral treaties. Later, following World War II, international organizations were established to promote trade by, for example, liberalizing tariff and nontariff trade barriers. The General Agreement on Tariffs and Trade, or GATT, signed by 23 non-Communist nations in 1947, was the first such agreement designed to remove or loosen barriers to free trade. GATT members held a number of specially organized rounds of negotiations that significantly reduced tariffs and other restrictions on world trade. After the round of negotiations that ended in 1994, the 123 member nations of GATT signed an agreement to establish the World Trade Organization (WTO). The WTO took over the activities of GATT in 1995. As of 1996 almost all of the 123 nations that had ratified the 1994 GATT agreement had transferred membership to the WTO. See also Commercial Treaties.

Trading Communities and Customs Unions

Several trading communities have been established to promote trade among countries that have common economic and political interests or are located in a particular region. Within these trade groups, preferential tariffs are administered that favor member countries over nonmembers. Non-Communist countries encouraged trade-promoting programs to stimulate the redevelopment of economies ruined during World War II. The North American Free Trade Agreement (NAFTA), ratified by Mexico, the United States, and Canada in 1993, was designed to bring about a free market in everything produced and consumed in the three countries.

The largest trading community in the world began in Europe in 1948 with the founding of the customs union known as Benelux—Belgium, the Netherlands, and Luxembourg. In 1951 France, West Germany, and the Benelux countries formed the European Coal and Steel Community (ECSC). These nations established the European Economic Community (EEC), often called the Common Market, in 1957. The ECSC, EEC, and other entities merged in 1967 to form the European Community (EC), which was succeeded in 1993 by the European Union. The Communist counterpart to these groups is the Council for Mutual Economic Assistance (COMECON). Established in 1949, it was dissolved in 1991 as a consequence of the political and economic changes in the Communist world.

World Trade

In the 20th century, trade increased, becoming a more dominant segment of the world’s economy. It is expected that the trend toward increasing interdependency among national economies will continue into the future.

History of Foreign Trade until the 20th Century

Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500. As empires and colonies were established by European countries, trade became an arm of governmental policy. Read more about History of Foreign Trade until the 20th Century here.

Source: “Foreign Trade”Microsoft® Encarta® Online Encyclopedia

See Also

Free Trade
World Trade Organization
General Agreement on Tariffs and Trade resources
Trade Dispute
Foreign Law Guide (FLG)
General Agreement on Tariffs and Trade
Trade law
Department of Foreign Affairs
Foreign law resources
Tariffs in the United States

In the United States

For information about Foreign Trade in the context of international trade, click here


See Also

Further Reading

  • Information about Foreign Trade in the Encyclopedia of World Trade: from Ancient Times to the Present (Cynthia Clark Northrup)

Foreign Trade and the Laws of International Trade

Competition Implications of Doing Business Overseas

Hierarchical Display of Foreign trade

Trade > Trade policy > Trade policy
Trade > Trade policy > Market > Foreign market

Foreign trade

Concept of Foreign trade

See the dictionary definition of Foreign trade.

Characteristics of Foreign trade

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Translation of Foreign trade

Thesaurus of Foreign trade

Trade > Trade policy > Trade policy > Foreign trade
Trade > Trade policy > Market > Foreign market > Foreign trade

See also

  • External trade



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