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International trade is the exchange of goods and services across international boundaries or territories.^[1] In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is basic to globalization.. International trade is a major source of economic revenue for any nation that is considered a world power. Without international trade, nations would be limited to the goods found within their own borders. Desire to acquire foreign goods, eventually, led to the period of exploration and eventual discovery of the Americas

International Trade Series v • d • e
International trade
History of international trade
Fair trade
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Trade bloc Preferential trading area
Free trade area
Customs union Trade creation Trade diversion
Monetary union
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Economic and monetary union

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.

Contents 1 International trade theory 1.1 Ricardian model 1.2 Heckscher-Ohlin model 1.3 Specific Factors 1.4 New Trade Theory 1.5 Gravity model 2 Regulation of international trade 3 Risks in international trade 3.1 Economic risks 3.2 Political risks 4 See also 5 Footnotes 6 External links 6.1 Data

Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs.

Main article: Ricardian model

The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

Main article: Heckscher-Ohlin model

The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.

The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance.

In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Hecksche-Ohlin model. The specific factors name refers to the given that in the short-run specific factors of production, such as physical capital, are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms. Additionally, owners of opposing specific factors of production (i.e. labour and capital) are likely to have opposing agendas when lobbying for controls over immigration of labour. Conversely, both owners of capital and labour profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

Main article: New Trade Theory

New Trade theory tries to explain several facts about trade, which the two main models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (ie foreign direct investment) which exists. In one example of this framework, the economy exhibits monopolistic competition, and increasing returns to scale.

Main article: Gravity model of trade

The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model.

Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then despite the acknowledgement that adoption of the policy coincided with the general decline of Great Britain. In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial.

Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.

Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.

During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.

The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, NAFTA between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely due to opposition from the populations of Latin American nations. Similar agreements such as the MAI (Multilateral Agreement on Investment) have also failed in recent years.

The risks that exist in international trade can be divided into two major groups:

• Risk of insolvency of the buyer,
• Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
• Risk of non-acceptance
• Surrendering economic sovereignty
• risk of Exchange rate

• Risk of cancellation or non-renewal of export or import licences
• War risks
• Risk of expropriation or confiscation of the importer's company
• Risk of the imposition of an import ban after the shipment of the goods
• Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
• Surrendering political sovereignty

• Absolute advantage
• American trade
• Balance of trade
• Borderless Selling
• Columbian Exchange
• Comparative advantage
• Customs union
• Ecological Economics
• Economics
• Export
• Free trade
• Free trade area
• Gravity model of trade
• Import (international trade)
• International trade law
• List of countries by imports
• List of countries by exports
• List of international trade topics
• List of economists
• Most favoured nation clause
• OPEC
• Political risk
• Protectionism
• Single Window System
• The Grand Exchange
• Trade bloc
• Trade of Japan

This article is missing citations or needs footnotes. Using inline citations helps guard against copyright violations and factual inaccuracies.(October 2007)

• Freetrade.org
• International Trade Centre
• Interactive Ricardian Model Simulator
• Consumers for World Trade Education Fund electronic trade library
• FITA's Really Useful Links for International Trade
• International Trade Portal for UK exporters and importers

• ExportNation Global Export Import Statistics

• World Bank's Trade and Production Database
• Resources for data on trade, including the gravity model
• European Union Trade Data
• Agricultural Trade Data by FAO
• Brazilian Trade Data

v • d • e International trade
Definitions	Balance of payments · Current account (Balance of trade) · Capital account · Foreign exchange reserves · Sovereign wealth funds · Net Capital Outflow · Comparative advantage · Absolute advantage · Import substitution · International trade
Organizations and policies	World Trade Organization · International Monetary Fund · World Bank Group · International Trade Centre · Trade bloc · Free trade zone · Trade barrier · Import quota · Tariff
Schools of thought	Free trade · Balanced trade · Mercantilism · Protectionism
Related issues	Globalization · Outsourcing · Trade justice · Fair trade