International trade is the lifeblood of the global economy, providing the goods and services that are traded across borders to bring wealth and prosperity to nations.
But how exactly does it work? The Organization for Economic Co-operation and Development (OECD) has tried to summarize everything in the following three tables.
How trade works
International trade flows through extremely complex supply chains between countries that source raw materials, manufacturing countries that manufacture and process them, and then consumer countries, which use the end products.
When trade is allowed to flourish, the link between supply routes, suppliers, processors and consumers behaves like a living being. When a change occurs at one link in the chain – say, when an iron ore miner goes bankrupt, or when the price of the metal suddenly rises – it will trickle down the chain.
Change can come from a variety of stimuli. Fluctuations in consumer demand for goods, technological innovations and new ways of moving products around the world are among the most common.
The rise of emerging markets
Over time, the nature of trade and the products transported will be dramatically transformed, which can have huge implications for national economies.
This is most striking in China’s economic boom. Once an impoverished country, it is now the world’s second-largest economy and the largest exporter of goods abroad, accounting for nearly 15% of all exports, according to United Nations data.
More generally, emerging markets have also experienced steady growth, as shown in the chart above. The lower wages, abundant land, and accommodating governments found in these countries provide manufacturers with a low-cost source of production.
With unfinished goods, components and services now accounting for 70% of all trade, emerging markets such as the BRIICS countries – including Brazil, Russia, India, Indonesia, China and Africa South – are the biggest beneficiaries of this development, their share of total world trade has exploded in recent years.
Barriers to trade in services
Trade in services is also vital to the economic health of a country. The international exchange of ideas, expertise and assistance – from architecture and law to logistics and telecommunications – accounts for half of all world exports and two-thirds of world GDP.
For this reason, they are vulnerable to political manipulation to protect particular national industries or to put pressure on other nations. The threat of non-tariff barriers – which include quotas on imports and subsidies to make local producers more competitive than foreign imports – and tariffs can alter trading patterns.
The importance of trade agreements
Such protectionist measures often have unintended consequences and create geopolitical friction. To guard against this and maximize the benefits of trade with favorable partners, multilateral trade agreements have multiplied since the Second World War.
The creation of groupings like the World Trade Organization, which emerged from the General Agreement on Tariffs and Trade, contributed to the creation of the globalized trade structures that we know today. They have also helped prevent trade disputes between nations from escalating into global trade wars.
The commercial card is constantly evolving
Even so, trade flows remain threatened with sudden revulsion. Geopolitical risks and unexpected natural disasters can all upset their fragile balance.
Climate change is also expected to have a huge impact on global trade. This has been highlighted over the past two years when the COVID-19 pandemic has radically reshaped the entire global trade network. Virus mitigation lockdowns, labor shortages, falling demand for some products, and growing demand for others have all helped tear the trade card apart.
As economies begin to recover from the financial blow from COVID, global trade is unlikely to return to its pre-pandemic patterns. What is certain, however, is that it will not stay that way for very long as global financial, political and environmental changes continue to exert their influence.
Source: World Economic Forum