How International Trade Shapes the Global Economy

International trading helps to drive economic development for countries and companies.¹ Trading across borders is a complex process that is regulated by many laws.

This blog post will examine some of the more significant concepts in global trade, illustrating why an Online Master of Studies in Law (MSL) with an International Business Law specialization can serve busy professionals who need to gain knowledge and experience in cross-border transactions and disputes.

What is International Trade?

International trade, or international business, is the buying and selling of goods and services by companies (and consumers) in different countries.² This is distinguished from domestic trade, which is the buying and selling of goods and services by companies and consumers within the same country.

Broadly speaking, three basic things get traded across international borders: goods, services, and capital. Goods are tangible items—fruit or string, for example.³ Services are intangible, such as legal advice.³ Capital is a slightly more complicated concept, but it is basically something that can be used to generate a benefit or value, such as money or machinery.⁴

How Does International Trade Work?

At its core, international trade transactions are imports and exports, typically governed by international trade agreements.⁵ These transactions typically occur between businesses, governments, or consumers in different countries and are facilitated through a series of standardized steps:

• Agreement: A buyer and seller agree on the terms of the transaction, including pricing and payment method
• Contract and Documentation: Contracts are signed and trade documents, such as invoices and customs forms, are prepared to meet international regulations
• Logistics and Shipping: Goods are packaged, shipped, and tracked using freight carriers. Customs agencies inspect and clear goods upon arrival
• Payment and Settlement: Payment is made using an agreed-upon method, such as wire transfers terms⁵

Because countries use different currencies, exchange rates play a central role in international trade. These rates determine how much one currency is worth relative to another. For example, if a U.S. company buys goods from Japan, the transaction may require converting U.S. dollars to Japanese yen at the current exchange rate. Financial institutions, including banks, help manage these currency exchanges.⁶

Another key concept is foreign exchange reserves, which accumulate when a country receives payments in foreign currency. These reserves give the country purchasing power in global markets and can be used to stabilize local currency or fund future imports. For example, if someone sells a service and the buyer pays in their local currency, that gives the seller a sum of the buyer’s currency to use to buy goods and services from their country.⁷

A third—and growing—issue in international trade is the application of tariffs to goods as they enter a country. A tariff is effectively a tax paid by the business or consumer in order to import the products.⁸ Tariffs are typically designed to protect and promote domestic producers against the effects of foreign production and exportation. In their purest form—countervailing duties and anti-dumping duties—they offset unfair economic advantages that other countries may give their domestic production. More and more, however, they are becoming tools of policy, as tariffs may be imposed because of trade imbalances or dissatisfaction with a trading partner.

The Role of Foreign Trade in Economic Growth

International trading can help grow a country's GDP and drive its economic development. This can largely be explained by the principle of comparative advantage, an economic concept that has been a primary argument in favor of international trade for almost as long as economics has existed as a discipline.

The concept of comparative advantage is that trade occurs between countries when one enjoys a comparative advantage in the production of a good or service that the other can use. For example, if my country grows coffee and yours does not, then my country has a comparative advantage over yours in coffee production.⁹

Trade’s Impact on Inflation and Consumer Prices

Countries seek to control international trade through a number of regulatory measures.

Tariffs, Quotas, and Laws

Tariffs and quotas are the main barriers that governments put in the way of international trading.⁹

A tariff is a duty or tax on an imported good. Its effect is generally inflationary, as it raises the price paid by the buyer (i.e., the company purchasing the good and/or the consumer). A quota is a limitation on the amount of a good that can be imported, similarly acting to drive prices up by restricting supply. Non-compliance with tariffs and quotas is generally a breach of law, resulting in legal or financial penalties against the non-compliant party.⁹

Anti-Dumping and Countervailing Duties

Sometimes, tariffs or duties are placed on imports as an anti-dumping measure. "Dumping" describes a situation where a company exports a good at below its market price, a practice that can often be a function of government subsidies. The practice may threaten industries in the importing country. As such, the importing government may levy a countervailing duty on goods being excessively subsidized by foreign exporters.¹⁰

Export Sanctions

A third mode for limiting international trading is the use of export sanctions. This is typically done by a government seeking to protect its national interest by limiting the sale of goods to another country—refusing to sell arms to a country that might invade one of your allies, for example.¹¹

In the United States, export sanctions are largely controlled by the U.S. Office of Foreign Assets Control (OFAC).¹² The EU delegates responsibility for sanctions enforcement to its member states.¹³

Dispute Resolution in International Trade

When countries have disputes about international trade, they are usually resolved through bilateral trade agreements. The World Trade Organization (WTO), however, is also an extremely important source of mediation for international trade disputes. WTO members have automatically agreed to use the WTO's dispute settlement mechanism if they are in dispute over WTO-related issues.¹⁴

The system can be long and complex. For example, Boeing and Airbus effectively sued each other for unlawful government subsidy of their rival's operations, and the WTO process lasted almost 20 years before reaching a (guarded) settlement in which the dueling governments agreed to suspend tariffs on the companies for five years.¹⁵

Master the Dynamics of International Trade With Pitt Law

Understanding the role and regulations of foreign trade is critical for many companies that want to grow. University of Pittsburgh School of Law offers both an Online MSL with an International Business Law specialization and an Online International Business Law Certificate, which are designed to prepare you for the complexities of international business and trade.

These programs offer training and experience that will prepare you for working with cross-border transactions, cultural differences, and other aspects of global trading. Schedule an appointment with an admissions outreach advisor to learn more about each program and the application process.