International trade system

Tracing the origin of most products - Starbucks coffee, McDonald's hamburger, Nike shoes, Macbook, etc., you'll see that they belong to an international trade system - a complex web of regulations, agreements, and logistical processes that allow goods and services to flow freely across national borders. If you are curious about how an international trade system works, this explanation is for you. You'll learn about the international trade concept and its relationship to globalization. We will also examine the interrelation between international trade systems and marketing. Of course, we will not leave you without examples of international trade systems! 

International trade system International trade system

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Table of contents

    International Trade System Definition

    The international trade system refers to the network of laws, regulations, and agreements that govern the exchange of goods and services between countries. It includes importing and exporting products and services across borders and the various rules and regulations that impact international trade. The international trade system is complex and constantly evolving, with many stakeholders shaping its development.

    The international trade system refers to the network of laws, regulations, and agreements that govern the exchange of goods and services between countries. It includes the various rules and regulations that impact international trade, such as tariffs, quotas, and trade agreements.

    An example of the international trade system in action is the North American Free Trade Agreement (NAFTA). NAFTA is a trade agreement between the United States, Canada, and Mexico designed to promote free trade between the three countries. Under NAFTA, tariffs and other trade barriers were gradually eliminated, making it easier for companies to do business across borders.

    Global Value Chains

    When it comes to international trade, you might think it consists of goods and services exported from one country to another. However, this kind of trade only made up 30% of global trade today. 70% of international trade comes from global value chains (GCVs).1

    A global value chain is a process whereby parts of goods are produced in multiple countries before being assembled into a final product and shipped to consumers worldwide.

    For example, an iPhone is made in multiple countries. Its battery comes from China. Camera and LCD screens are outsourced to Japan. Switzerland chips in the gyroscope (a device that acts as a stabilizer in a mobile). An accelerometer is produced in Germany. Glass screens, wifi, and audio chip producers are based in the US with locations in China, Taiwan, Thailand, Vietnam, Italy, Finland, etc. All these components are eventually assembled by two Taiwanese companies - Foxconn and Pegatron.2

    As a result, international trade often involves firms making strategic decisions about where to invest, outsource, and carry out production to achieve quality and cost advantage.

    International Trade System and Globalization

    Globalization also plays a significant role in fostering international trade.

    Globalization is the process of the world becoming interconnected through trade and cultural exchange.

    Due to globalization, communications and transportation among countries have increased, making products in one country more available in foreign markets. As companies find more opportunities abroad, they start producing more goods and services, primarily through outsourcing and investing in developing countries. This process stimulates international trade and global economic growth.

    Companies that operate in and sell goods to many countries are multinational corporations (MNCs).

    International marketing has been around for centuries. It is necessary since most countries rely on others to obtain goods or commodities they cannot produce. This is why the Silk Road was established in the 15th century - to link economic and cultural exchange between the West and the East. However, due to a lack of communication and expensive transportation of goods, international trade in the past was greatly limited. The development of today's technology and digital media is the main reason for increasing international trade and globalization.7

    International trade takes place because no country is self-sufficient. It has to import materials or products it lacks while selling the extra goods it produces.

    Overall, there are five fundamentals (reasons) for international trade:

    1. Differences in technology,

    2. Differences in resources,

    3. Differences in demand,

    4. Economies of scale,

    5. Government policies.

    International Trade System in Marketing

    Whether a product is sold domestically or internationally, it has to be promoted to the right audience. However, marketing to a global market is not always easy. While the international trade system frees the global market, multinational companies still face challenges such as local adaptation and competition with domestic firms. As a result, they must adapt marketing strategies to fit into different markets.

    International marketing means marketing products to people worldwide. It is the process of planning, creating product offerings, setting prices, promoting, and distributing goods and services to the global market.

    International marketing takes place between two or more countries. It requires companies to tailor their marketing strategy to each market. Global marketing provides companies with many opportunities, such as a broad customer base and market reach. However, there are also many threats and challenges.

    The first step to international marketing is identifying entry modes: exporting, licensing, franchising, foreign direct investment, and joint ventures. The entry mode will decide the marketing approach the business should use.

    Check out our explanation of the Market Entry Strategy to learn more.

    For example, licensing and franchising will give domestic partners more control or flexibility over sales and marketing. Local partners can adapt product menus or flavors to suit local preferences. On the other hand, companies that choose to enter another market through joint ventures or subsidiaries retain more control over how they promote the product.

    McDonald's is one of the most well-known fast food franchisors. The company "leases" its brand name, logo, etc., to its franchisees while providing training, support, and tools to help individual partners set up and promote the business effectively. However, they also leave room for franchisees to bring their unique ideas to life. Many successful products of McDonald's, such as the Big Mac, Filet-O-Fish, and Egg McMuffin, are all ideas that originated from franchisees.

    Coca-Cola is another recognizable brand that has a successful global marketing strategy. Coca-Cola maintains a coherent marketing strategy worldwide: happiness and pleasure. Yet, Coca-Cola customizes its offering for each country to match the local culture and language. For example, in the global marketing campaign "Share a Coke," which originated in Australia and then spread to over 50 countries, the company printed famous names in each location on its cans and bottles.5

    International trade vs international marketing

    International trade refers to exchanging goods and services across national borders, while international marketing refers to promoting and selling products or services in different countries. International trade is primarily concerned with the logistics and economics of moving goods and services across borders, including tariffs, customs regulations, and currency exchange rates. On the other hand, international marketing is focused on understanding and adapting to cultural differences and consumer preferences in different countries and developing marketing strategies tailored to specific markets.

    International Trade System Examples

    Examples of international trade systems include, the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA), the Association of South East Asian Nations (ASEAN), and the European Union.

    Some of these systems are not only trade system. The European Union (EU) and the Association of Southeast Asian Nations (ASEAN), for example, are regional political and economic organizations that go beyond just trade. These organizations also aim to promote cooperation and integration among member countries in various areas, including foreign policy, security, cultural exchange, and trade.

    World Trade Organization (WTO)

    The WTO (World Trade Organization) is the largest global trade system in the world. Its main tasks include fostering international trade while maintaining rules for global economic transactions.

    The WTO is headquartered in Geneva, Switzerland, and has been joined by 165 countries (as of 2021). It has several critical functions:

    • Provide a framework for trade negotiations,

    • Eliminate trade barriers like tariffs, quotas,

    • Resolve trade disputes,

    • Prevent discrimination between trading partners.

    WTO also follows five principles:

    • Non-discrimination,

    • Reciprocity,

    • Binding and enforceable commitment,

    • Transparency,

    • Safety values.

    The existence of WTO has contributed to increased global trade activities, reduced trade barriers, and reduced trade disputes among nations. However, not everyone is happy with WTO and international trade. Many argue that they lead to a decline in domestic industries while increasing foreign influence.6

    International trade system - Key takeaways

    • International trade is the economic transactions between countries.
    • An international trading system is a combination of rules, regulations, and agreements among countries involved in international trade.
    • Globalization makes international trade possible. It is the process where the world becomes an interconnected place through trade and cultural exchange.
    • International marketing means marketing products to people worldwide.
    • The WTO (World Trade Organization) is the largest global trade system in the world.

    References

    1. OECD. How trade works. https://www.oecd.org/trade/understanding-the-global-trading-system/how-trade-works.
    2. Sam Costello. Where Is the iPhone Made?. Lifewire. 2021. https://www.lifewire.com/where-is-the-iphone-made-1999503.
    3. Paul Wonnacott. International trade. Britannica.https://www.britannica.com/topic/international-trade.
    4. Evan Tarver, World Trade Organization (WTO): What It Is and What It Does. Investopedia. 2022. https://www.investopedia.com/terms/w/wto.asp.
    5. Smartling. What Can We Learn from Coca-Cola's Global Marketing Success?. 2022. https://www.smartling.com/resources/101/what-can-we-learn-from-coca-cola's-global-marketing-success.
    6. Wikipedia. World Trade Organization. 2022. https://en.wikipedia.org/wiki/World_Trade_Organization.
    7. Dr. Jean-Paul Rodrigue. Globalization and International Trade. The Geography of Transport Systems. https://transportgeography.org/contents/chapter7/globalization-international-trade.
    Frequently Asked Questions about International trade system

    What are the types of international trading systems?

    International trade includes imports and exports. Imports are goods and services brought to one country from another. Exports are goods and services produced domestically and sold to another country. There is also international trade from global value chains. 

    What is the importance of the international trading system?

    International trade is important as it provides a country with commodities or materials that it lacks. It also helps improve people's living standards worldwide and contributes to global economic growth. An international trade system like the WTO makes global trade freer by reducing trade barriers. 

    What are the five basics of international trade?

    The five basics of international trade are: 

    1. Differences in technology
    2. Differences in resource endowments
    3. Differences in demand, 
    4. Economies of scale, 
    5. Government policies.

    What are the main components of international trade?

    Goods and services made up 30% of international trade. The rest (70%) is trade from global value chains (GCVs) - a process of assembling the final products from parts made in multiple nations. 

    Test your knowledge with multiple choice flashcards

    International trade is important as it provides a country with commodities or materials that it lacks.

    _______ are goods and services brought to one country from another. 

    _________ are goods and services produced domestically and sold to another country. 

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