The world is becoming more and more connected these days. You can call friends in America, work from Asia for a company in Europe, or buy clothes from a store in Australia. So globalization is constantly evolving. And global trade in goods and services is also growing as a result.
But what does that actually mean, who regulates it world trade and how did it come about that we can trade with people from all over the world?
World trade – simply explained
Trade in goods, services or capital, i.e. assets, determines the economy of many countries around the world.
It is between the so-called domestic trade and the foreign trade distinguished.
domestic trade describes the trade in goods, services and capital within the borders of a state or an alliance of states.
foreign trade describes the trade of goods, services and capital across these borders.
In domestic trade, companies or states do not have to pay any customs duties. In foreign trade, on the other hand, customs duties are charged for the goods traded.
duties are payments that are always incurred when you want to bring goods out of a country or into a country.
They are requested by customs authorities at the borders of a country.
These tariffs are often a major hurdle in global trade world trade. They make products from abroad more expensive to compensate for the additional costs. This, in turn, often reduces sales. That is why some states are repeatedly demanding lower or no tariffs at borders.
World Trade – Definition
If foreign trade is not only conducted between two neighboring countries, for example, but extends to all continents, this is called world trade.
Of the world trade describes all trade flows of goods, services and capital between the different countries of the world.
The trade flows can be divided into so-called imports and exports be distinguished. Import means the import of a good into a country, while export means the export of a good from a country.
The extent to which a country participates in world trade and how many goods a country imports and exports varies greatly around the world.
For example, the US exported $1,800 billion worth of products in 2021. The Netherlands, on the other hand, exported around $800 billion worth of products this year, trading about $1,000 less. Nevertheless, both nations are among the largest export countries worldwide.6
Free world trade and protectionism
Differences in world trade are also reflected in the trade policy of the individual states. With their trade policies, countries regulate their imports and exports and pursue specific goals.
free trade
Most countries in the world try to organize their foreign trade as freely as possible, which is also called free trade. World trade should also be organized as freely as possible.
In free trade, few should trade barriers be created to make it easier for states to import and export goods.
Trade barriers are, for example, tariffs and import quotas.
Import quotas limit the import of goods into a country with specific numbers that must not be exceeded. Among other things, it may be that a country only wants to import a certain number of cars from abroad, so there is a quota for that.
Different standards for environmental protection and occupational safety also stand in the way of free trade and are therefore trade barriers.
In order to remove trade barriers, several countries often come together to form an alliance. Within this alliance, customs duties at national borders are usually abolished and common laws on foreign trade are passed.
A well-known example of such a state alliance is the European Union. Within the EU, for example, no customs duties are required at the borders of the individual member states and laws and regulations on trade with each other have been jointly defined.
This facilitates internal trade in the EU enormously and the European Union is even the largest single market in the world.2
Would you like to know more about the European Union? Then take a look at the explanation!
protectionism
The opposite of free trade is the so-called protectionism. States want to use this trade policy to protect and strengthen their domestic trade. To this end, these countries build up many trade barriers and thus try to prevent imports and exports for the most part. This can only affect a specific industry or the entire economy of the country.
For example, if the car industry in a country is not yet well developed and does not stand a chance against major competitors on the international market, the country tries to protect and, above all, strengthen this industry.
For example, if cars are not allowed to be imported from abroad, residents have to buy cars from the domestic auto industry. As a result, companies’ profits increase and they become stronger and more competitive.
World Trade – Development
Centuries ago, people from different continents traded with each other. At that time, goods such as spices or fabrics were mainly traded. At that time, goods were mainly transported by large merchant ships.
With the process of industrialization in the 19th century in many states, such as European countries and America, world trade also developed. With new inventions such as the locomotive and large steamships, much more goods could be transported quickly and over long distances from this time on. This made global trade much easier.
Industrialization describes the development of a state from an agricultural state to an industrial state and is characterized by many inventions and innovations. You can find more about this in the declaration of the same name.
That General Agreement on Tariffs and Trade GATT The middle of the 20th century was another big step in the development of world trade. The agreements made with this arrival made international trade freer and world exports and imports increased sharply in the decades that followed.
In 1948, the value of all world exports was about 60 billion US dollars. In 1970, this figure had more than quintupled and was just under 320 billion US dollars.1
You can read more about what exactly the GATT agreement regulates in the chapter on the regulation of world trade.
World trade – globalization
After the industrialization of many countries, it is mainly the globalization advance world trade. Viewed differently, world trade also influences the further development of globalization, so the two processes benefit each other.
the globalization refers to a process in which all parts of the world are becoming ever stronger, faster and better connected.
This networking of continents and countries creates new and better opportunities for trade time and time again.
Companies are becoming international, so they no longer have just one seat, but several seats in different countries. These so-called multinational companies are among the most important players in world trade.
The possibility of communication across oceans also simplifies trading processes, for example, contracts can be concluded easily over the Internet.
Due to the strong networking of the states, there are also great dependencies between the countries. This makes world trade particularly vulnerable to crises. If the trade in a product depends on only a few countries that suddenly can no longer produce enough goods, or if many countries close their borders, global trade collapses and can no longer take place as usual.
A very recent example of such a global trade crisis is the war between Russia and Ukraine. The two states are among the world’s top five wheat exporters, accounting for 18.8% and 9.1% of global exports.3 Some states around the world are therefore dependent on the wheat production of these two states.
The war in Ukraine has destroyed a large part of the harvest and both countries are severely reducing wheat exports. Grain is already becoming scarce in many countries around the world and the people there are threatened with hunger.
world trade flows
During the development of world trade, great differences between the countries and continents of the world have arisen.
The most pronounced trade flows of goods, services and capital between countries, too world trade flows called, take place between the largest exporting countries in the world.
In 2020, the top five exporting nations were China, the US, Germany, Japan and France.4
Above all Developing countries fall far behind in global comparison. They usually only make up a small part of global trade and cannot keep up with strong industrialized countries such as China and the USA.
This is mainly due to the fact that their industry is hardly developed and they are therefore only able to export agricultural products. However, these are much cheaper than cars, for example, and therefore bring much less profit in foreign trade.
World trade regulation
World trade must be regulated and monitored fairly and justly so that trade between states is regulated and no unfair agreements are made or individual countries gain too much power.
World Trade Organization WTO
International trade in goods, services and capital is mainly regulated and monitored by the World Trade Organization, WTO for short.
the World Trade Organization WTO is an independent organization for the promotion and monitoring of free world trade.
It was founded in 1995 on the basis of the GATT agreement and lays down the basic rules for world trade. In addition, it monitors all players in global trade and thus ensures that world trade runs fairly. 164 countries are currently members of the WTO.
The goals of the World Trade Organization are as free world trade as possible without trade barriers and preventing individual countries from being disadvantaged in competition.
In order to be able to achieve these goals, the WTO acts according to three principles:
- Most Favored Nation Principle: all countries must be treated equally by the members
- national principle: Equal treatment of domestic and foreign goods, services and capital
- reciprocity principle: the results and benefits of a negotiation between countries must be balanced
World Trade Organization Agreement
The World Trade Organization lays down the basic rules for world trade in various agreements between all member states.
The three most important agreements of the WTO are:
- General Agreement on Tariffs and Trade GATT with the aim of lowering tariffs and freeing up world trade in goods
- General Agreement on Trade in Services GATS to the…