Dynamics of Global Trade: Imports, Exports, and Why They Matter

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Dynamics of Global Trade: Imports, Exports, and Why They Matter

Business Essentials · Chapter 3: International Business and Global MarketsSection 3.2 · lesson 15 of 10516 min · free with a free account

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In this lesson

How trade is recorded, priced in currencies, and carried out.

  • Define imports and exports of goods and services
  • Explain the balance of trade and of payments
  • Describe how exchange rates affect trade
  • Outline what an export sale involves

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International Business and Global Markets

Dynamics of Global Trade: Imports, Exports, and Why They Matter

The previous section asked why countries trade at all. This one asks a more practical question. How is trade actually carried out, and how is it recorded? We'll start with imports and exports, including the services trade that people tend to forget. Then we'll read the national accounts, meaning the balance of trade, and the wider balance of payments. After that comes the exchange rate. It's the price that quietly decides who wins when a currency moves. We'll see why a single currency move can be good news for one firm, and bad news for its neighbor. And we'll finish on the ground, with the paperwork and payment terms behind a real export sale. One idea runs through all of it. Trade numbers sound like a scorecard, but they're usually something more subtle.

The Basic Terms

Imports and Exports, in Goods and Services

Start with the two basic terms. An import is a good or service produced in a foreign country, and bought by a buyer at home. An export runs the other way. It's produced at home, and sold to a buyer abroad. Both terms cover goods, meaning physical products like machinery and grain. They also cover services, like tourism, transport, banking, education, and software. Services are easy to overlook, because they cross borders without a shipping container. Here's the case that trips people up. A foreign visitor stays in a domestic hotel. Nothing leaves the country, yet that stay counts as an export of services. A foreign resident is paying the domestic economy. Now flip it around. A company that has its accounts prepared by a firm abroad is importing a service. This is not a side issue. In the United States, services make up a substantial part of exports. That's according to the Bureau of Economic Analysis and the Census Bureau, which publish trade data jointly.

Keeping The Score

The Balance of Trade and of Payments

Once trade is happening, countries keep score. The simplest score is the balance of trade. It's the value of a country's exports, minus the value of its imports, over some period. When exports are bigger, that's a trade surplus. When imports are bigger, it's a trade deficit. You can measure it for goods alone, for services alone, or for both together. That choice matters, because a country can run a deficit in goods and a surplus in services, at exactly the same time. The balance of trade is only one part of a wider record, called the balance of payments. That's the systematic record of every transaction between a country's residents and the rest of the world. It's compiled by double entry, so every transaction has two sides. That gives an identity. A current account deficit is matched by net inflows in the capital and financial accounts. In plain terms, a country running a deficit is having foreigners lend to it, buy its assets, or invest in its businesses. A country running a surplus does the opposite. It's acquiring claims on the rest of the world. But notice what the identity does not tell you. It doesn't say which side causes the other, and that fuels much disagreement.

Table 3.2.1

The Components of the Balance of Payments

Here are the parts of the balance of payments, each with an example. The current account comes first, and it has four pieces. Goods are the obvious one. A domestic firm sells machinery to a foreign customer, and that's an export. Services come next. A foreign tourist pays a domestic hotel, or a firm buys design services from abroad. Primary income is what's earned on investment and labor across borders. A resident collecting dividends on shares in a foreign company is the classic case. Secondary income is transfers, where nothing is given in return. A worker abroad sends money home to family. The capital account is smaller. It covers capital transfers and non-produced assets, like a government canceling a debt another country owes it. Last is the financial account, which records investment. A foreign firm building a factory here belongs there, and so do foreign bond purchases. Here's the point to take away. Trade in goods and services is only part of the current account. So the trade balance alone can't say whether a country is borrowing from abroad. The financial account reveals that.

Deficits And Surpluses

Neither Simply Good Nor Bad

The words deficit and surplus suggest loss and gain. That's misleading, and here's why. First, the worried view. A persistent deficit means a country consumes more than it produces, and borrows or sells assets to cover the gap. Claims on the country build up, and its future income gets committed to servicing them. A deficit may also reflect import competition that cost jobs, and it leaves the country exposed if foreign lenders pull back. Now the relaxed view. A deficit may reflect strong demand, or an attractive place to invest, since foreigners send capital where returns are good. And imported machinery can raise future productive capacity. On that view, what matters is what the borrowing is used for, and whether it can be sustained. The argument about surpluses is the mirror image. A surplus may reflect weak demand or high saving. The country ships goods abroad in return for claims, not for goods to consume. Yet a surplus also builds foreign assets, supports export jobs, and cushions external shocks. Some of this dispute is empirical. What causes these balances, how long can they last, and what do they do to jobs and growth? Some of it is normative. How much weight goes to consumption today against obligations tomorrow, or export jobs against consumer prices? Two cautions about headlines. A goods deficit is often offset in services or capital flows, so a goods figure alone is partial. And a balance with a single country, called a bilateral balance, tells you very little. A country can run a deficit with one partner and a surplus with another. And a product assembled from parts made in several countries is recorded at full value, in the country it last shipped from.

Exchange Rates

The Price of One Currency in Another

Trade across borders usually means converting one currency into another. That's where exchange rates come in. An exchange rate is simply the price of one currency, in terms of another. To keep things clean, this section uses a fictional currency, called the alder. Suppose one dollar buys two alders. You can write that as two alders per dollar. The very same rate is fifty cents per alder. Why fuss over the direction? Because the words rise and fall mean opposite things in the two conventions. So use the clearer words. A currency appreciates when it becomes worth more, so it buys more of the other currency. It depreciates when it becomes worth less. Now the worked case. The dollar moves from two alders to two and a half alders. Each dollar buys more alders than before, so the dollar has appreciated. By the same move, the alder has depreciated. Always ask which currency a headline is talking about, before you decide whether a move is good news.

Who Gains, Who Loses

One Currency Move, Two Opposite Effects

Here's where exchange rates stop being abstract. The same move hits importers and exporters in opposite directions. These are illustrative figures, constructed for the exercise. Take an importer that pays its supplier in alders. At two alders to the dollar, its bill costs ten thousand dollars. After the dollar appreciates to two and a half alders, the same bill costs eight thousand dollars. Foreign goods got cheaper. Now take an exporter that prices its product in dollars, at that same ten thousand. To a foreign buyer, the price was twenty thousand alders. After the move, it's twenty-five thousand alders. Nothing about the product changed, but it now looks more expensive abroad, and the exporter may lose sales. Run the movie backward and everything flips. A dollar depreciation favors the exporter, and hurts the importer. Here's the uncomfortable part. These shifts redistribute advantage between firms in the same economy. And they have nothing to do with how well those firms are managed. The exchange rate is a competitive factor that management simply does not control.

Market Forces

What Moves Exchange Rates

So what moves exchange rates? They're set in markets where currencies are traded, and the forces fall into a few groups. Relative interest rates matter. Investors seeking higher returns move funds to the country offering them, which raises demand for its currency. Inflation differentials matter too. A currency with persistently higher inflation tends, over time, to lose value against lower-inflation ones. Trade flows matter, because buying a country's exports means buying its currency first. So strong demand for a country's exports tends to support its currency. Capital flows work the same way. Foreigners buying a country's assets need its currency to do it. And expectations matter, which is the slippery one. Traders act on what they think will happen. So a belief that a currency will fall can itself make it fall. These forces interact, and they can pull in different directions at once. That's why exchange rates are notoriously hard to forecast. The practical lesson is blunt. A business should never treat any currency prediction as a certainty.

Exchange Rate Risk

Who Carries the Currency Risk?

If rates can't be predicted, a business has to manage the exposure instead. Exchange rate risk is the chance that a rate change reduces a firm's income, or raises its costs. It bites hardest on a deal agreed today, in a foreign currency, but paid at a future date. There are four broad responses, and each one has a cost. A firm can choose the currency of the contract, invoicing in its own and passing the risk to the other party. It can adjust its prices when rates change. Or it can match foreign currency receipts against foreign currency payments, so gains and losses offset. It can also use financial instruments, such as a forward contract that fixes a rate for a future date, or an option. None of these is recommended here. The right choice depends on size, margins, and risk tolerance, and specialist advice should come first. Now a composite case, with illustrative figures. Kenji is sales director at a machinery maker that prices everything in dollars. A competitor in the same foreign market prices in alders. Over the year, the alder depreciates. Kenji's dollar prices never change, yet his distributor pays noticeably more alders per machine. So the next order goes to the rival. The loss came from who bore the risk. The rival absorbed the currency move in its own margin, and kept the buyer's cost steady. Pricing in alders would win the distributor back, but it would expose Kenji's thin margins, with no hedging experience. So Kenji asks the real question. Not whether the risk exists, but who is better placed to carry it. Then he talks to his bank.

The Export Sale

Documents, Filings, and Customs

Now to the mechanics. An export sale involves more steps than a domestic one, and most of them are paperwork. There's a commercial invoice and a packing list, describing the goods and their value. There's a transport document, most commonly a bill of lading, which records that the carrier has received the goods. There are insurance documents and, where required, a certificate of origin. The exporter must also file shipment information with the government. Some goods need an export license, because the Bureau of Industry and Security controls exports of certain items. The parties also agree who bears costs and risks at each stage of the journey. For that, they widely use Incoterms, a standard set of trade terms published by the International Chamber of Commerce. Then comes customs, the authority that controls goods crossing a border and collects duties. A duty is a tax on imported goods, usually charged as a percentage of their value. The rate depends on how the good is classified in the Harmonized System, a standard international set of product codes. Rules of origin decide which country a good counts as coming from. That matters, because preferential duty rates under trade agreements apply only to goods that qualify. Every one of these carries obligations, and penalties for error. That's why businesses commonly use customs brokers or counsel.

Getting Paid

Payment Terms, by Rising Risk to the Exporter

Getting paid is its own problem. Payment terms decide who carries the risk that the money never arrives. They range in order of increasing risk to the exporter. Cash in advance means the buyer pays before shipment. The seller is protected, and the buyer is burdened. A letter of credit is a bank's promise to pay the seller, once specified documents are presented. Credit risk shifts from buyer to bank. A documentary collection also uses banks to pass documents and payment. But it doesn't guarantee payment. Open account is the far end. Goods ship, the buyer pays later, and the seller is entirely exposed. Why is non-payment riskier across a border than at home? The buyer is harder to assess, and legal recovery is slower and costlier. So intermediaries exist to manage these problems. Banks, freight forwarders that arrange transport, and customs brokers that handle clearance all play a part. So do export trading and management companies, which sell on behalf of producers. The financing of trade itself comes back later, in chapter twenty-four, alongside banking.

The First-Time Exporter

Four Questions Before the First Sale

Finally, picture a small business thinking about exporting for the first time. Four questions organize the decision. The demand question asks whether customers in the target market want the product, at a price that can be charged. Answering it takes market research, not an assumption. The cost question asks what shipping, duties, documents, adaptation, and currency will add, and whether the margin survives. The capability question asks whether the firm can produce the extra volume, handle the paperwork, and serve customers across time zones. And the risk question asks how much the firm can afford to lose, if payment fails, currencies move, or the market never develops. A business that can't answer all four isn't ready yet. But working through them may be the first step toward exporting. It also doesn't have to answer them alone. The International Trade Administration, part of the Department of Commerce, provides market information and contacts. The Small Business Administration offers export assistance and loan programs for small firms. Export credit agencies, like the Export-Import Bank of the United States, finance and insure sales that private lenders might not cover. State governments, trade associations, and chambers of commerce help as well. These programs change, so check what's currently available. Next, we'll ask how a business that has decided to go abroad should choose its way in.

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FAQ

Questions students ask us

About Dynamics of Global Trade: Imports, Exports, and Why They Matter

Can services count as exports?
Yes, services such as tourism, transport, banking, education, and software count as exports when a foreign resident pays a domestic provider. A foreign visitor staying in a domestic hotel is an export of services even though nothing leaves the country. Likewise, a company that has its accounts prepared by a firm abroad is importing a service. In the United States, services make up a substantial part of exports.
What is the difference between the balance of trade and the balance of payments?
The balance of trade is a country's exports minus its imports, for goods, services, or both, while the balance of payments records every transaction between its residents and the rest of the world. The balance of payments includes the current account, the capital account, and the financial account. Because it uses double-entry bookkeeping, a current account deficit is matched by net inflows in the capital and financial accounts.
Is a trade deficit bad for an economy?
A trade deficit is not automatically bad; whether it signals trouble depends on its causes, how any borrowing is used, and whether it can be sustained. One view stresses that a persistent deficit builds foreign claims on future income and may reflect lost jobs. Another notes it can reflect strong demand, an attractive place to invest, or imported machinery that raises future capacity. A deficit with a single partner country tells you very little.
What are the main payment methods in international trade?
The main payment methods, from least to most risk for the exporter, are cash in advance, letters of credit, documentary collections, and open account. Cash in advance protects the seller fully. A letter of credit is a bank's promise to pay once specified documents are presented, shifting credit risk from buyer to bank. A documentary collection routes documents through banks without guaranteeing payment, and open account leaves the seller entirely exposed.

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