Everything about Trade totally explained
Trade is the voluntary exchange of
goods,
services, or both. Trade is also called
commerce. A mechanism that allows trade is called a
market. The original form of trade was
barter, the direct exchange of goods and services. Modern traders instead generally negotiate through a medium of exchange, such as
money. As a result,
buying can be separated from
selling, or
earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade.
Trade exists for many reasons. Due to specialisation and division of labor, most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a
comparative advantage in the production of some tradable commodity, or because different regions' size allows for the benefits of
mass production. As such, trade at
market prices between locations benefits both locations.
Trading can also refer to the action performed by
traders and other market agents in the
financial markets.
History of trade
Trade originated with the
start of communication in
prehistoric times. Trading was the main facility of prehistoric people, who bartered goods and services from each other before the innovation of the modern day currency.
Peter Watson dates the
history of long-distance commerce from
circa 150,000 years ago.
Trade is believed to have taken place throughout much of recorded human history. There is evidence of the exchange of
obsidian and
flint during the
stone age. Materials used for creating
jewelry were traded with
Egypt since 3000 BC. Long-range trade routes first appeared in the
3rd millennium BC, when
Sumerians in
Mesopotamia traded with the
Harappan civilization of the
Indus Valley. The
Phoenicians were noted sea traders, traveling across the
Mediterranean Sea, and as far north as
Britain for sources of
tin to manufacture
bronze. For this purpose they established trade colonies the Greeks called
emporia. From the beginning of
Greek civilization until the fall of the
Roman empire in the 5th century, a financially lucrative trade brought valuable
spice to Europe from the far east, including
China.
Roman commerce allowed its empire to flourish and endure. The Roman empire produced a stable and secure transportation network that enabled the shipment of trade goods without fear of significant
piracy.
The fall of the Roman empire, and the succeeding
Dark Ages brought instability to
Western Europe and a near collapse of the trade network. Nevertheless some trade did occur. For instance,
Radhanites were a medieval guild or group (the precise meaning of the word is lost to history) of
Jewish merchants who traded between the
Christians in
Europe and the
Muslims of the
Near East.
The
Sogdians dominated the East-West trade route known as the
Silk Road after the 4th century AD up to the 8th century AD, with
Suyab and
Talas ranking among their main centeres in the north. They were the main caravan merchants of
Central Asia.
From the 8th to the 11th century, the
Vikings and
Varangians traded as they sailed from and to
Scandinavia. Vikings sailed to Western Europe, while Varangians to
Russia. The Hanseatic League was an alliance of trading cities that maintained a trade monopoly over most of
Northern Europe and the
Baltic, between the 13th and 17th centuries.
Vasco da Gama restarted the European
Spice trade in 1498. Prior to his sailing around
Africa, the flow of spice into Europe was controlled by Islamic powers, especially Egypt. The spice trade was of major economic importance and helped spur the
Age of Exploration.
Spices brought to Europe from distant lands were some of the most valuable commodities for their weight, sometimes rivaling
gold.
In the 16th century,
Holland was the centre of free trade, imposing no
exchange controls, and advocating the free movement of goods. Trade in the
East Indies was dominated by
Portugal in the 16th century, the
Netherlands in the 17th century, and the
British in the 18th century. The
Spanish Empire developed regular trade links across both the
Atlantic and the
Pacific Oceans.
In 1776,
Adam Smith published the paper
An Inquiry into the Nature and Causes of the Wealth of Nations. It criticised
Mercantilism, and argued that
economic specialisation could benefit nations just as much as firms. Since the
division of labour was restricted by the size of the market, he said that countries having access to larger markets would be able to divide labour more efficiently and thereby become more
productive. Smith said that he considered all rationalisations of
import and
export controls "dupery", which hurt the trading nation at the expense of specific industries.
In 1799, the
Dutch East India Company, formerly the world's largest company, became
bankrupt, partly due to the rise of competitive free trade.
In 1817,
David Ricardo,
James Mill and
Robert Torrens showed that free trade would benefit the industrially weak as well as the strong, in the famous theory of comparative advantage. In
Principles of Political Economy and Taxation Ricardo advanced the doctrine still considered the most counterintuitive in
economics:
» When an inefficient producer sends the merchandise it produces best to a country able to produce it more efficiently, both countries benefit.
The ascendancy of free trade was primarily based on national advantage in the mid 19th century. That is, the calculation made was whether it was in any particular country's self-interest to open its borders to imports.
John Stuart Mill proved that a country with
monopoly pricing power on the international market could manipulate the
terms of trade through maintaining
tariffs, and that the response to this might be
reciprocity in trade policy. Ricardo and others had suggested this earlier. This was taken as evidence against the universal doctrine of free trade, as it was believed that more of the
economic surplus of trade would accrue to a country following
reciprocal, rather than completely free, trade policies. This was followed within a few years by the
infant industry scenario developed by Mill promoting the theory that government had the "duty" to
protect young industries, although only for a time necessary for them to develop full capacity. This became the policy in many countries attempting to
industrialise and out-compete
English exporters. Milton Freidman later continued this vein of thought, showing that in a few circumstances tariffs might be beneficial to the host country; but never for the world at large.
The
Great Depression was a major economic recession that ran from 1929 to the late 1930s. During this period, there was a great drop in trade and other economic indicators.
The lack of free trade was considered by many as a principal cause of the depression. Only during the
World War II the recession ended in United States. Also during the war, in 1944, 44 countries signed the Bretton Woods Agreement, intended to prevent national trade barriers, to avoid depressions. It set up rules and institutions to regulate the international political economy: the International Monetary Fund and the International Bank for Reconstruction and Development (later divided into the World Bank and Bank for International Settlements). These organisations became operational in 1946 after enough countries ratified the agreement. In 1947, 23 countries agreed to the
General Agreement on Tariffs and Trade to promote free trade.
Free trade advanced further in the late 20th century and early 2000s:
Development of money
» Main article: History of money
The first instances of money were objects with intrinsic value. This is called
commodity money and includes any commonly-available commodity that has intrinsic value; historical examples include pigs, rare seashells, whale's teeth, and (often) cattle. In medieval
Iraq, bread was used as an early form of money. In
Mexico under
Montezuma cocoa beans were money.
(External Link
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Currency was introduced as a standardised money to facilitate a wider exchange of goods and services. This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years.
Numismatists have examples of coins from the earliest large-scale societies, although these were initially unmarked lumps of
precious metal.
Ancient Sparta minted
coins from iron to discourage its citizens from engaging in foreign trade.
The system of commodity money in many instances evolved into a system of
representative money. In this system, the material that constitutes the money itself had very little intrinsic value, but nonetheless such money achieves significant market value through scarcity or controlled supply.
Current trends
Doha rounds
The Doha round of
World Trade Organization negotiations aims to lower
barriers to trade around the world, with a focus on making
trade fairer for
developing countries. Talks have been hung over a divide between the rich,
developed countries, and the major developing countries (represented by the
G20).
Agricultural subsidies are the most significant issue upon which agreement has been hardest to negotiate. By contrast, there was much agreement on
trade facilitation and capacity building.
The Doha round began in
Doha,
Qatar, and negotiations have subsequently continued in:
Cancún,
Mexico;
Geneva,
Switzerland; and
Paris,
France and Hong Kong.
China
Beginning around 1978, the government of the
People's Republic of China (PRC) began an experiment in economic reform. Previously the
Communist nation had employed the
Soviet-style
centrally planned economy, with limited results. They would now utilise a more
market-oriented economy, particularly in the so-called
Special Economic Zones located in the
Guangdong,
Fujian, and
Hainan.
This reform has been spectacularly successful. By 2004, the
GDP of the nation has quadrupled since 1978 and foreign trade exceeded USD 1 trillion. As of 2005, China had become the 3rd largest exporter behind Germany and the United States. This occurred in spite of the backlash from the shootings following
Tiananmen Square protests of 1989. The PRC maintains a USD 29 billion trade surplus, and is rapidly becoming a leader in industrial manufacturing.
In 1991 the PRC joined the
Asia-Pacific Economic Cooperation group, a trade-promotion forum. More recently, in 2001 they also joined the
World Trade Organization.
See also: Economy of the People's Republic of China
International trade
» Main article: International trade
International trade is the exchange of goods and services across national borders. In most countries, it represents a significant part of
GDP. While international trade has been present throughout much of history (see
Silk Road,
Amber Road), its economic, social, and political importance have increased in recent centuries, mainly because of
Industrialisation, advanced transportation,
globalisation,
multinational corporations, and
outsourcing. In fact, it's probably the increasing prevalence of international trade that's usually meant by the term "globalisation".
Empirical evidence for the success of trade can be seen in the contrast between countries such as
South Korea, which adopted a policy of
export-oriented industrialisation, and
India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An
embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an
embargo against
Cuba for over 40 years.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or
subsidies. All of these are called
trade barriers. If a government removes all
trade barriers, a condition of free trade exists. A government that implements a
protectionist policy establishes trade barriers.
The
fair trade movement, also known as the
trade justice movement, promotes the use of
labour,
environmental and
social standards for the production of
commodities, particularly those exported from the
Third and
Second Worlds to the
First World.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of
employment and
commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of
goods made using
slave labour to minimum
price support schemes such as those for coffee in the 1980s.
Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with
fairtrade labelling requirements.
Leading IMPORTERS in world trade
in merchandise, data from WTO, 2005 |
| Rank |
Country |
Value
bn USD |
Share % |
annual %
change |
| 1 |
|
1,732.4 |
16.1 |
14 |
| 2 |
|
773.8 |
7.2 |
8 |
| 3 |
|
660.0 |
6.1 |
18 |
| 4 |
|
514.9 |
4.8 |
13 |
| 5 |
|
510.2 |
4.7 |
8 |
| 6 |
|
497.9 |
4.6 |
6 |
| 7 |
|
379.8 |
3.5 |
7 |
| 8 |
|
359.1 |
3.3 |
12 |
| 9 |
|
319.7 |
3.0 |
15 |
| 10 |
|
318.7 |
3.0 |
12 |
Leading EXPORTERS in world trade
in merchandise, data from WTO, 2005 |
| Rank |
Country |
Value
bn USD |
Share % |
annual %
change |
| 1 |
|
969.9 |
9.3 |
7 |
| 2 |
|
904.4 |
8.7 |
10 |
| 3 |
|
762.0 |
7.3 |
28 |
| 4 |
|
594.9 |
5.7 |
5 |
| 5 |
|
460.2 |
4.4 |
2 |
| 6 |
|
402.4 |
3.9 |
13 |
| 7 |
|
382.8 |
3.7 |
10 |
| 8 |
|
367.2 |
3.5 |
4 |
| 9 |
|
359.4 |
3.4 |
14 |
| 10 |
|
334.3 |
3.2 |
9 |
Organization of trade
Patterns of organizing and administering trade include:
State control - trade centrally controlled by government planning.
Guild control - trade controlled by private business associations holding either de facto or government-granted power to exclude new entrants.
Free enterprise - trade without significant central controls; market participants engage in trade based on their own individual assessments of risk and reward, and may enter or exit a given market relatively unimpeded.
Infrastructure in support of trade, such as banking, stock market,
Technology in support of trade such as electronic commerce, vending machines.
International organizations
European Common Market
GATT = General Agreement on Tariffs and Trade
G8
IMF = International Monetary Fund
OPEC = Organization of the Petroleum Exporting Countries
Free trade areas
Free trade organizations or free trade areas
United Nations umbrella
UNCTAD = United Nations Conference on Trade and Development
WTO = World Trade Organization
ITC = International Trade Centre
Types of trade
Commodities
Staples
Luxuries
Slave trade
International trade
Arms trade
Wholesaling
Retailer
Stock exchange
Fair TradeFurther Information
Get more info on 'Trade'.
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