Principles And Components Of International Trading System

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Traditionally, trade was regulated through bilateral treaties between two nations. After the World War II, as free trade emerged as the dominant doctrine, multilateral treaties like GATT and WTO became the principal regime for regulating global trade. Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. Trade can take place within an economy between producers and consumers (Hayes, 2019).

International trade allows countries to expand markets for both goods and services that otherwise may not have been available to it. International trade allows countries to expand their markets for both goods and services that otherwise may not have been available domestically. As a result of international trade, the market contains greater competition, and therefore more competitive prices, which brings a cheaper product home to the consumer (Heakal, 2019).

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Components of the International Trading System

International Trade System refers to the exchange of products and services from one country to another. In other words, imports and exports. International trade consists of goods and services moving in two directions:

1. Imports – flowing into a country from abroad.

2. Exports – flowing out of a country and sold overseas.

Major categories of components in international trading system are;

  • Geography
  • Culture and Society
  • Economy
  • Politics and Law
  • Import and Exports

Import and Export is a major component of the international trading system are imports and exports. This is the building block of trade as the dependency of nations on each other is a contributing factor to globalisation. Import and Exports refer to the exchange of goods and services into and out of a country.

Geography is the climate, terrain, seaports, and natural resources of a country. If the countries are close to each to other like in Europe, people in Austrian and Switzerland learn French and German to be able to communicate and make business with other companies. This kind of relationship helps them during war as they know and have been trading with each other for a long time. The pattern of trade will change as increasing transportation costs outweigh traditional sources of comparative advantage, such as lower wages. The new geography of trade will not result from policy or treaties but from the impact of changing environmental conditions due to the growth of the human economy. Location of seaports, cargo, trade routes and climate can either positively or negatively impact the movement of goods and services and the costs associated.

Culture and Society refers to the accepted behaviours, customs, and values of a society to include language, education, religion, values, customs, and social relationships. International business deals not only cross borders, they also cross cultures. Culture profoundly influences how people think, communicate, and behave. It also affects the kinds of transactions they make and the way they negotiate them. Religious beliefs can influence trading behaviour in mainly two ways. First, sharing the same religious belief often implies sharing similar values. A common religion may therefore enhance trust between trading partners and reduce transaction costs. As a consequence, the trade volume between traders of the same religion should be higher than trade between different religions. Second, each religion has its own ethical standpoint towards the activity of trading.

Politics and Law are the type of government, the stability of the government, and government policies toward business; and anti-corruption and anti-bribery laws, import and export regulations, labour laws, intellectual property protection and licensing, product safety, and consumer protection. Any business operating in foreign markets should protect their supply chain and logistics operations from political risk. Political events often affect operations performed by your business suppliers. Such interruptions include increased tariffs, trade bans, and delays in delivery.

Economy refers to the types of industries and jobs in the country and the stability of the country’s money supply. Other economic changes that affect business include changes in the interest rate, wage rates, and the rate of inflation (i.e. general level of increase in prices). Businesses will be more encouraged to expand and take risks when economic conditions are right, e.g. low interest rates and rising demand. The economy is a driving force in the regulation of trade policies and agreements for both domestic and international trade. Economy influences trade as a booming or strong economy generates the need for more trade. An economy that is performing well will give businesses and individuals the means to trade as they are better able to access more goods and services and all associated costs, for procurement, shipping, storage etc. A poor performing economy will impact the amount of goods a country can import and export in terms of the monetary means to provide goods and services worth shipping.

There are four major cost components in international trade, known as the “Four Ts”:

  • Transaction costs. The costs related to the economic exchange behind trade. It can include the gathering of information, negotiating, and enforcing contracts, letters of credit and transactions, including monetary exchange rates if a transaction takes place in another currency. Transactions taking place within a corporation are commonly lower than for transactions taking place between corporations. Still, with e-commerce they have declined substantially.
  • Tariff and non-tariff costs. Levies imposed by governments on a realized trade flow. They can involve a direct monetary cost according to the product being traded (e.g. agricultural goods, finished goods, petroleum, etc.) or standards to be abided to for a product to be allowed entry into a foreign market. A variety of multilateral and bilateral arrangements have reduced tariffs and internationally recognized standards (e.g. ISO) have marginalized non-tariffs barriers.
  • Transport costs. The full costs of shipping goods from the point of production to the point of consumption. Containerization, intermodal transportation and economies of scale have reduced transport costs significantly.
  • Time costs. The delays related to the lag between an order and the moment it is received by the purchaser. Long distance international trade is often related with time delays that can be compounded by custom inspection delays. Supply chain management strategies are able to mitigate effectively time constraints, namely through the inventory in transit concept. (Spulber, D.F. 2007)

General Agreement on Tariffs and Trade (GATT) and The World Trade Organization (WTO)

The General Agreement on Tariffs and Trade (GATT), signed on Oct. 30, 1947, by 23 countries, can be described as an International treaty that committed signatories to lowering barriers to the free flow of goods across national borders led to the WTO. It was a legal agreement minimizing trade barriers to international trade by eliminating or reducing quotas, tariffs, and subsides while preserving significant regulations. The GATT was intended to boost economic recovery after World War II through reconstructing and liberalizing global trade. GATT main roles includes:

  • The prohibition of quantitative restrictions
  • Providing the framework in which negotiations can be held for the reduction of any trade barriers that may result in severe decrease of trading activities
  • The agreement also provided a system to arbitrate commercial disputes among nations, and the framework enabled a number of multilateral negotiations for the reduction of tariff barriers.
  • To protect against non-discrimination as a means to prevent trading wars to avoid damage to trading interests of contracting parties.

According to Majaski (2019), GATT went into effect on Jan. 1, 1948. Since that beginning it has been refined, eventually leading to the creation of the World Trade Organization (WTO) on January 1, 1995, which absorbed and extended it. By this time 125 nations were signatories to its agreements, which covered about 90% of global trade. The Council for Trade in Goods (Goods Council) is responsible for the GATT and consists of representatives from all WTO member countries. As of September 2019, the council chair is Uruguayan Ambassador José Luís Cancela Gómez. The council has 10 committees that address subjects including market access, agriculture, subsidies, and anti-dumping measures.

The World Trade Organization (WTO) is an organization that succeeded the General Agreement on Tariffs and Trade (GATT) as a result of the successful completion of the Uruguay round of GATT negotiations. The roles of the WTO in regulating global trade consists of:

  • It operates a global system of trade rules by dealing with the rules of trade between nations at a near-global level by ensuring that each member state facilitates global trade to its best ability.
  • It settles trade disputes between its members and it supports the needs of developing countries.
  • Negotiating and implementing new trade agreements as a means to minimize tariffs in member states without affecting the trading economy and also by fostering trade between developed and developing countries as a means of economic boost for less developed countries.
  • Supervising member countries to ensure that they adherence to all the WTO agreements, signed by the majority of the world’s trading nations and ratified in their parliaments.
  • It acts as a forum for negotiating trade agreements and reviewing national trade policies and to ensure the coherence and transparency of trade policies through frequent surveillance in global economic policy making. This prevents unsuspected peeks/changes in the customs duties or trading regulations that would hinder global trading.

UNCTAD and the Role It Plays in International Shipping

According to United nations Research Guide, the United Nations Conference on Trade and Development (UNCTAD) is the United Nations body responsible for dealing with development issues, particularly international trade – the main driver of development. UNCTAD is also a forum where representatives of all countries can freely engage in dialogue and discuss ways to establish a better balance in the global economy.

In addition, UNCTAD offers direct technical assistance to developing countries and countries with economies in transition, helping them to build the capacities they need to become equitably integrated into the global economy and improve the well-being of their populations.

UNCTAD is an integral part of the multilateral development system. As the focal point of the United Nations on trade and development and the interrelated issues of finance, investment, technology and sustainable development, its distinctiveness lies in its treatment of development against the multifaceted challenges arising from the fast-changing world economy and international trade. Over more than four decades in the service of development, UNCTAD has consistently addressed the concerns and endeavoured to advance the interests of all developing countries in the international economic and trading systems. In the context of deepening interdependence between developed and developing countries, as well as among the latter, this unique orientation of the organization will continue.

The main functions of the UNCTAD are:

  • To promote international trade between developed and developing countries with a view to accelerate economic development.
  • To formulate principles and policies on international trade and related problems of economic development.
  • To make proposals for putting its principles and policies into effect, (iv) To negotiate trade agreements.
  • To review and facilitate the coordination of activities of the other U.N. institutions in the field of international trade.
  • To function as a centre for a harmonious trade and related documents in development policies of governments.


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