Why do we trade?
Trade happens because people need or want things that they don’t have. We also trade for work that we cannot do ourselves. Trade between countries happens for the same reason. Some countries, for example, have natural resources, like coal, oil or wood which other countries might want to buy. They try to sell the goods, products or services that they have too much of to other countries. They earn money from these sales and then can buy the things that they themselves need and cannot produce on their own.
Both producers and consumers profit from international trade. If countries can produce goods more cheaply than others because they specialize on them why not let them. They make more money on one side and consumers in other countries can buy goods that are cheaper.
Even though many nations have a lot of different goods to export there are countries that depend only on one or two products to get money. Saudi Arabia, Kuwait and other countries of the Middle East depend on oil exports, because it is pretty much the only thing that they can sell. Poor countries in Africa depend largely on the export of tropical farm products to get money.
Each year goods and services worth about 11 trillion dollars are traded all over the world. The biggest exporting nations are The United States, France, Germany, the United Kingdom, Canada and Japan.
The difference between what a country exports and what it imports is called the balance of trade. If a country exports more than it imports we call this a trade surplus. And if a country pays more for its imports than it gets for its exports it has a trade deficit.
How trade is limited
In some countries the government controls all trade and in others it allows companies and firms to trade freely. However, all governments control trade in some way.
Sometimes a government forbids companies to buy or sell dangerous or illegal products, or military technology. When companies expand and get bigger they often take over others and form a monopoly. Governments pass laws to prevent companies from becoming too strong and powerful and from controlling the market.
Many governments try to help their own industries by making it more difficult to import foreign products. They put import taxes on foreign goods to make products more expensive and their own products cheaper. A government may also limit the number of products that it will buy from another nation. European countries, for example, may limit the number of cars that are imported from Japan or the USA. They want their people to buy European cars. We call this strategy protectionism because governments want to protect their companies and industries.
History of trade
Trading is as old as mankind. The early civilizations of Mesopotamia or Egypt traded among themselves and with other people. Gradually, trade routes developed over land and sea. These were used to transport spices, salt, minerals and jewels over great distances.
In the 15th century Europeans started exploring the seas to find new trade routes to Asia. The Portuguese explored the coast of Africa, the Spanish, English and French set across the Atlantic and founded colonies in the New World.
In the 1700s the Industrial Revolution began in Great Britain. During the following two centuries it became the most powerful trading nation in the world. The British sold goods to its colonies and received raw materials from them.
During this era governments did not interfere much with free trade. As a result many owners became very rich. They kept all the money themselves and paid workers badly. In the first half of the 20th century World War I and the Great Depression led to the decline of world trade. Many governments introduced new plans to help their own companies’ workers.
After the Second World War the big countries of the free world tried to improve free trade. Some have formed trading blocs that trade freely. The biggest of them are the European Union, NAFTA and South America’s Mercosur. About 150 countries are members of the World Trade Organization, an institution that sets up rules for world trade.