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. While these products are marketed under one brand name, they are made and assembled in multiple locations worldwide. 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 how it relates to globalization and marketing.
International Trade System Definition
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 is the economic transactions between countries.2
All kinds of products are sold in international trade, including consumer goods (e.g., clothing or mobile phones), capital goods (e.g., machinery used in production), food, and raw materials. There are also service transactions, such as international payments or travel services.
International trade is essential as it provides a country with commodities or materials it lacks. It also helps improve people's living standards worldwide and contributes to global economic growth.
An international trading system manages rules, regulations, and agreements concerning trade among nations.
The first international trading system appeared after WWII to promote economic cooperation among nations. 23 member countries founded the GATT (General Agreement on Tariffs and Trade) in 1948, later becoming the most prominent global trade system known today - the WTO (Word Trade Organization). The WTO governs rules for international trade and allows member countries to negotiate trade agreements. It is also a platform for mediating trade disputes.4
One significant benefit of the WTO is that it promotes freer trade among nations by reducing trade barriers such as tariffs and quotas.
International Trade System and Globalization
International trade involves the selling of goods and services between countries. When goods are brought into one country from another, they are called imports. When companies sell goods to countries abroad, these goods are called exports.
Imports are goods and services brought to one country from another. As a result, imports increase the outflow of cash from the importing country.
Exports are goods and services produced domestically and sold to another country. Exports will result in an inflow of cash for the exporting country.
The flow of funds by imports and exports is part of the Gross Domestic Product (GDP).
GDP = C + I + G + X - M
Where:
- C = Consumer expenditure
- I = Investment expenditure
- G = Government expenditure
- X = Total exports
- M = Total Imports
(X - M) is called net exports. Positive net exports indicate a trade surplus, whereas negative net exports indicate a trade deficit.
Since imports can threaten domestic businesses, countries often have measures to reduce imports, such as taxes and quotas. Taxes on imports are called tariffs. Tariffs increase the price of imports, reducing their competitiveness in the local market. Quotas are the maximum quantity a foreign seller can import into the host country.
On the other hand, exports are highly encouraged as they bring in funds for the nation. One popular governmental measure to stimulate exports is subsidies. Subsidies are financial support by a government to an economic sector or business to increase its output.
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:
Differences in technology,
Differences in resources,
Differences in demand,
Economies of scale,
Government policies.
Globalization also plays a significant role in fostering international trade.
Globalization is the process where the world becomes an interconnected place 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 back in the 15th century - to provide a link for 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 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.
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 System Example
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:
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
- OECD. How trade works. https://www.oecd.org/trade/understanding-the-global-trading-system/how-trade-works.
- Sam Costello. Where Is the iPhone Made?. Lifewire. 2021. https://www.lifewire.com/where-is-the-iphone-made-1999503.
- Paul Wonnacott. International trade. Britannica.https://www.britannica.com/topic/international-trade.
- Evan Tarver, World Trade Organization (WTO): What It Is and What It Does. Investopedia. 2022. https://www.investopedia.com/terms/w/wto.asp.
- 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.
- Wikipedia. World Trade Organization. 2022. https://en.wikipedia.org/wiki/World_Trade_Organization.
- Dr. Jean-Paul Rodrigue. Globalization and International Trade. The Geography of Transport Systems. https://transportgeography.org/contents/chapter7/globalization-international-trade.
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