Trade: Meaning, Importance, Examples & Types (2024)

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The meaning of trade

Global trade, otherwise known as international trade, is:

The exchange (importing and exporting) of goods and services between countries.

International trade occurs due to what economist David Ricardo (1817) termed comparative advantage. Comparative advantage is the notion that different countries can produce specific goods and services more specifically than other countries.

International trade occurs because it is, at least theoretically, cost-effective for each trading partner.

Importance of trade in developing countries

As sociologists looking at global development, we shall not probe into the economics of international trade but instead look at the different theoretical arguments about trade and its importance to international development.

Therefore, we will look at the advantages of trade for development, argued by modernisation theorists and neoliberals, followed by how dependency theorists such as Andre Gunder Frank (1971) criticise the role international trade plays.

Though there are many types of trade and examples of trade, e.g. ‘free-trade’, internal trade, retail trade, etc., we shall primarily use the case study of ‘Fairtrade’ (discussed below) to look at the role of international trade in developing countries.

Types of trade

As you may know, trade comes in many forms. The different types of trade are:

• Free trade

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• 'Fair trade'

• Internal trade

• Retail trade

Advantages of trade

Modernisation theorists and neoliberalism both argue in favour of trade for development. For them, international trade is essential to the economic growth of developing countries.

Theorists like Jeffery Sachs (2005) argue:

• Trade is more effective and sustainable than aid in supporting development – it helps countries become self-sufficient.

• Developing countries have a comparative advantage concerning: their abundance of natural resources e.g. oil, rare minerals, metals, and 'cash crops’, and their low wages/ low labour costs, which can and should be used to attract foreign investment from Transnational Corporations (TNCs).

The argument is that this comparative advantage can and should be used to establish a successful export-led economy, bringing in 1) wealth, 2) TNCs, and 3) further inward investment.

Collectively, the extra money can then be spent on improving the living standards within the country, such as:

1. Improved infrastructure.

2. Higher numbers of better paying, skilled jobs.

3. Improvement of educational outcomes, as TNCs require skilled workers.

4. Encouragement of international trade - opening new markets should increase economic growth.

However, modernisation and neoliberal theorists also argue that developing countries must ‘lure’ TNCs by creating favourable conditions for them, such as:

1. Privatising public companies

2. Relaxing workplace regulations

3. Establishing 'free-trade’ agreements with the country the TNC is from

Free trade is trade without restrictions, e.g. no tariffs (import taxes) and no quotas (limits on how much a country can import).

While these conditions invite more foreign trade, they all reduce developing countries' share of the revenue from trade. This means they have less to be reinvested into the wider economy and improve living standards, and can lead to erosion of workers' rights and human rights overall.

Indonesia granted the TNC Freeport mining rights to one of the world's largest copper and oil reserves, with a decade-long tax break, to attract them into the country.Instead of the expected positive 'trickle down' effects, Freeport pays $20 million annually to the government for security, which has been linked to human rights abuses. Alongside this, the mine has destroyed the surrounding environment and poisoned the water, bringing little benefit to local people.²

Fig. 1 - Signs of a successful export-led economy or containers of hidden exploitation?

Aware of the limitations of the current international trade system, mainly how trading conditions are unfavourable and exploitative for developing countries, theorists like Sachs (2005) nevertheless believe that trade is nonetheless essential for development.

For Sachs, trade problems can be solved by creating fairer and more equal conditions of trade -- which he sees as the removal of any trade barriers, particularly by rich developed nations. As Sachs (2019) states:

We are totally dependent on open trade to even live...food is traded. Energy is traded. Basic technologies are traded. Medicines are traded". ³

Arguments against trade

Dependency theorists and ‘radicals’ (i.e. neo-Marxists) are both critical of trade as an aspect of development. Primarily, they are critical of the unfair and biased conditions imposed on developing countries’ terms of trade.They argue:

• Rich, ‘core’ nations use their dominance in world trade to ensure prices of goods from poor, ‘periphery’ and ‘semi-periphery’ countries are kept low (Immanuel Wallerstein, 1970). Consequently, this leaves little available income for LEDCs to invest in development projects and reduce poverty levels.

• Free trade is imposed on developing countries. Historically, free trade was imposed through Structural Adjustment Programmes (SAPs) and currently through Export Processing Zones (EPZs) used to lure in TNCs. Again, this reduces the profit that LEDCs and their local producers can earn.

• MEDCs / ‘core’ nations create favourable conditions for themselves - they ‘artificially’ lower the cost of their own produced goods. They do so through subsidies, alongside imposing quotas and tariffs on LEDCs.

Subsidies are "a payment from the government to private entities, usually to ensure firms stay in business and protect jobs" (Boyce, 2020: online).⁴

The EU spends $65 billion a year subsidising its agriculture. ⁵

Unfair trade rules: a double standard in terms of trade. ‘Free trade’ deals are imposed on LEDCs by MEDCs in return for debt relief and aid contributions, whilst LEDC exports are taxed heavily by MEDCs.

Alongside this, other arguments are that:

• Trade is another form of neo-colonial exploitation. Neo-Marxists and dependency theorists argue that through the refinement cycle, the overwhelming share of profits goes towards the TNCs that ship, package and sell the products in MEDCs. As the prices local farmers receive are so low, this has severe knock-on effects. Nowhere is this clearer than with exporting commodities such as coffee beans, cocoa, tea, tobacco, etc.

Take the refinement cycle of coffee...Coffee beans are firstly farmed in developing countries. They are then bought, processed, shipped, and packaged by various businesses that charge higher and higher prices along the way.A typical bag of coffee in a supermarket in the UK can range from £2.50 to £5+.However, on average, coffee farmers only earn 7-10% of this retail value, i.e. only 25p! This is as low as 2% of the retail value in Brazil. In many instances, this is simply not enough for coffee farmers to survive. Consequently, the illegal use of child labour increases, school enrolment decreases, and slave-like conditions are reported on coffee plantations.⁶

• The push to specialisation within developing countries has led to an overly heavy reliance on exporting a few primary products. In turn, this has made developing countries' economies very susceptible to factors outside of their control.

Following the 2008 financial crash and, more recently, the COVID-19 pandemic, world prices of commodities fell due to the reduced demand in MEDCs following a recession.

Due to growing opposition to the unfair trade conditions outlined above, the Fairtrade movement was established. Let’s have a look at what that’s brought about and whether it has had any impact on trade for developing countries.

Examples of trade: Fairtrade and development

Fairtrade is a movement symbolised by a logo on packaging that indicates more favourable terms of trade for local producers in developing countries. Hopefully, the logo (shown below) is one you are familiar with!Specifically, Fairtrade means:

Goods are produced ethically, and local producers receive higher, fairer prices, irrespective of low global market prices.

Alongside this, Fairtrade symbolises that:

1. Products are produced sustainably.

2. Workers can form trade unions.

3. No child labour is involved.

4. Men and women are treated equally.

5. Increasingly, local producers earn enough to invest some of their wages into other areas of social development, such as education and healthcare.

Fig. 2 - Fairtrade: a sign of progress or just another marketing device?

How does Fairtrade promote development?

The increases in income from Fairtrade are meant to increase areas of social development.

However, Fairtrade still has its critics and its limitations.

Criticisms and limitations of Fairtrade

• 1.7 million Fairtrade workers are just a ‘drop in the ocean’ compared to the billions of workers in developing countries.

• Neoliberals argue that it interferes with the ‘free market’, privileging some producers over others.

• Like Ndongo Sylla (2014), some argue that the Fairtrade logo has become a marketing device for corporations. Fairtrade rhetoric is not matched by actual impacts.

• The Fairtrade economic model has a structural contradiction.

  1. If Fairtrade prices are higher than average global market prices, there will be a reduction in sales of Fairtrade products, and the overall reach of Fairtrade will be limited.

  2. If Fairtrade prices are similar to average global market prices (i.e. what they would have received anyway), then the ‘increased’ wages with Fairtrade are negligible, and there will be no impact on alleviating poverty.

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What are the different types of trade?

What is an example of a trade?

An example of trade is international trade; the UK exports £32 billion worth of cars each year internationally. Likewise, the UK imports £11 billion in clothing.

Why is trade important for development?

Modernisation theorists and neoliberals would argue that trade is essential to economic growth. Trade: 1) is more effective and sustainable than Aid, 2) allows developing countries to take advantage of their natural resources and low labour costs, and 3) attracts foreign direct investment into the country.

What is a trade?

Global trade, otherwise known as international trade, is the exchange(importing and exporting) of goods and services between countries.

What is the importance of trade?

Trade is important as it maintains a competitive global economy keeping the price of goods low. It is also an important factor in raising living standards in developing countries. Further, in developing countries, trade provides employment opportunities and can spur the development of the home-grown industry.

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