What is trade?
The term ‘trade’ is a basic concept referring to the buying and selling of goods and services, with compensation paid by buyers to sellers. Trade can also involve the exchange of goods and services between parties such as people, businesses, countries, and corporations.
The article’s purpose is to briefly explain the following usages of the term in accounting, business, and finance.
- Trade credit
- Trade deficit
- Trade finance
- Trade sanction
- Trade surplus
- Trade war
What is trade credit?
Trade credit is an agreement or understanding between a buyer and supplier of goods or services in which the buyer is not required to immediately pay for goods or services but at a later date. Such an agreement is referred to as ‘the supplier extends credit to the buyer.’
Some traders consider trade credit as a type of short-term debt without any finance charges.
Typically, trade credit is offered for periods of 7, 15, 30, 60, 90, or 120 days. However, suppliers of jewellery may grant longer periods of trade credit.
In accounting, trade credit extended to a buyer by a supplier is recorded as accounts receivable in the accounting system of the supplier. Conversely, trade credit extended to a business by its suppliers is recorded as accounts payable in the accounting system of the business.
What is a trade deficit?
A trade deficit refers to the amount by which a country’s imports exceed its exports during a specific period of time such as a quarter or a fiscal year.
It is also called a negative balance of trade (BOT) and is one method to measure the international trade of a country. Some of the other methods are:
- Balance of trade: A basic measurement of the difference between a country’s exports and imports, comprising both goods and services.
- Trade surplus: See the explanation under ‘Trade surplus’ in the article.
- Balance of payments: An estimate of the total flow of money out or into a country.
A trade deficit is calculated by deducting the total value of a country’s exports from the total value of its imports.
One of the reasons for the occurrence of a trade deficit is a country’s inability to manufacture some of its own products. Hence, the raw materials for manufacturing are exported to foreign countries, and the finished products are imported at a higher value to the country.
What is trade finance?
Trade finance is a strategy that utilises various financial instruments and products to enable exporters and importers to conduct international trade easily and hassle-free.
The process of trade finance
In simple words, trade finance is required when an importer of goods is required by an exporter to pay in advance for goods conveyed from one country to another.
Consequently, the importer requests the exporter to provide a document as proof that the goods have been shipped.
Furthermore, the importer’s bank reduces the risk involved in international trade, guaranteeing payment to the exporter for the goods shipped by providing for payment upon receiving certain documents, such as a bill of lading.
Also, the bank (or other financial institution) of the exporter may grant a loan on the basis of the export contract.
According to the World Trade Organisation (WTO), ‘some 80 to 90 percent of world trade relies on trade finance.’
What are trade sanctions?
Trade sanctions are laws and regulations passed by a country to restrict or discontinue trade with another country or countries.
Trade sanctions can be executed in two ways:
- Unilateral: Sanctions are imposed by one country on another country.
- Multilateral: Sanctions are imposed by one or more countries on different countries.
Trade sanctions comprise various forms, such as:
- A complete embargo is a severe type of sanction. Typically, it implies an official ban on trade with a specific country.
- Quotas are trade restrictions that restrict the amount and number of specified goods that can be exported and imported during a certain period of time.
- Tariffs are one of the most common tactics used by a country to protects its economy and markets. This tactic involves taxing products that are being imported, resulting in higher costs for imports and additional revenue for the specific country.
Trade sanctions could be implemented for economic or political reasons.
What is a trade surplus?
A trade surplus occurs when the exports (goods and services) of a country or region exceed its imported goods and services. A trade surplus is the opposite of a trade deficit.
It is also referred to as a positive balance of trade or a favourable balance of trade.
Put differently, a trade surplus implies that there is a net inflow of the currency of the exporting country (domestic currency) from foreign markets.
Some effects of a trade surplus:
- A trade surplus can create employment and generate economic growth.
- However, it can cause higher prices of products and services and an increase in interest rates within a country.
- A trade surplus enables a country’s currency to strengthen in relation to the currencies of other countries.
What is a trade war?
A trade war also called an economic conflict between countries, starts when one country is convinced that another country is engaging in unfair trading practices that are hurting the aggrieved country’s economy and markets.
The aggrieved country retaliates by imposing trade barriers that can include several tactics, such as:
- Quotas
See quotas above under ‘Trade sanctions.’
- Tariffs
Refer tariffs above under ‘Trade sanctions.’
- Currency devaluation
Devaluing its currency in relation to a foreign currency is another tactic that can be implemented by a country. The result is that domestic exports become more competitive in other countries, while imports from foreign countries become relatively more expensive.
- Embargos
Refer to embargos above under ‘Trade sanctions.’
Typically, a country that retaliated against will start with a counter retaliation, imposing different trade barriers.
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