International trade forms a critical pillar in the economic activities of cooperatives in Kenya, enabling access to wider markets and diverse resources beyond national borders. Understanding international trade equips cooperative managers with the skills to navigate cross-border transactions, regulatory frameworks, and global economic dynamics. This chapter explores the fundamental concepts of international trade and the international balance of payments, both of which are essential for cooperative professionals seeking to enhance competitiveness and sustainability in an increasingly interconnected world.

10.1 Concept of international trade

International trade is the exchange of goods, services and capital between people, firms and governments in different countries. No country produces everything its citizens need, because climate, natural resources, skills and technology differ from one country to another. Trade lets each country sell what it produces well and buy what it cannot produce, or can only produce at high cost. Example: a tea cooperative in Kericho sells its tea to buyers abroad and uses the foreign currency earned to pay for imported fertilizers and machinery.

10.1.1 Meaning

International trade, also called foreign trade, is the buying and selling of goods and services across national borders. It involves different currencies, different laws and customs rules, and usually requires documents, transport and payment arrangements that domestic trade does not. Example: a hotel in Mombasa that buys imported kitchen equipment from Germany and pays in euros is engaging in international trade, just as a flower farm in Naivasha that sells roses to buyers in the Netherlands.

International trade has two main flows:

• Exports: Goods and services produced in one country and sold to buyers in other countries, earning foreign currency. Examples include coffee, tea, cut flowers and tourism services.
• Imports: Goods and services bought from other countries for use at home, which uses up foreign currency. Examples include petroleum products, vehicles, pharmaceuticals and industrial machinery.
• Re-exports: Goods imported into a country and then sold on to a third country with little or no processing. A trading company in Mombasa that receives goods at the port and sells them to buyers in Uganda is carrying out re-exports.
• Visible trade: Trade in tangible goods that can be seen, counted and inspected at the border, such as maize, cement and motor vehicles.
• Invisible trade: Trade in services that cannot be touched, such as banking, insurance, shipping, tourism and education. A SACCO that receives remittances for members from abroad is taking part in invisible trade.

Why Countries Trade

Countries trade because resources and skills are unevenly spread and because trade allows each country to use its resources where they are most productive:

• Unequal distribution of resources: Some countries have oil, minerals or fertile land while others do not. Kenya has ideal conditions for tea and horticulture but depends on imported crude oil products.
• Differences in production costs: A country buys from abroad any good that it can obtain more cheaply than it can produce.
• Specialisation: Countries concentrate on goods they produce most efficiently, then trade the surplus for other goods. This is the basis of comparative advantage.
• Differences in technology and skills: Advanced machinery, medical equipment and software are often produced in only a few countries and must be imported by schools, hospitals and contractors elsewhere.
• Need for larger markets: Selling abroad allows producers to grow beyond a small home market, which lowers cost per unit through large-scale production.

10.1.2 Advantages and disadvantages

International trade brings clear gains to countries, firms and consumers, but it also carries risks when a country trades without planning or depends heavily on a few partners and products. Example: a Kenyan farm that exports avocados earns foreign currency and creates jobs, but the same farm is exposed to falling world prices and changing import rules in the buying country.

Advantages of International Trade

• Access to goods not available locally: Consumers and firms obtain goods that cannot be produced at home, such as medical imaging machines for a county hospital or aircraft for an airline.
• Wider choice and lower prices: Competition from imports gives consumers more variety and pushes local producers to keep prices reasonable.
• Earning of foreign exchange: Exports bring in foreign currency that pays for essential imports and supports the value of the shilling.
• Larger markets and economies of scale: Producers who sell abroad produce in bigger quantities, which lowers the cost of each unit and increases profit.
• Employment and income: Export industries such as horticulture, tea processing and tourism create jobs for farmers, packers, drivers and hotel staff.
• Transfer of technology and skills: Imported machinery and foreign investors bring new methods and training that improve local productivity.
• Efficient use of resources: Specialisation directs land, labour and capital to the activities where the country is most productive.
• Better international relations: Trading partners depend on each other, which encourages cooperation and peaceful relations.

Disadvantages of International Trade

• Over-dependence on other countries: A country that relies on imports for fuel or food is hurt when supply is interrupted or prices rise abroad.
• Damage to infant industries: Cheap imports can drive young local firms out of business before they are strong enough to compete.
• Unfavourable terms of trade: Countries exporting raw materials may find that import prices rise faster than export prices, so they earn less from each unit sold.
• Import of harmful or inferior goods: Without proper inspection, substandard products, counterfeit goods and harmful substances can enter the market.
• Risk from world price swings: Export earnings for commodities such as coffee and tea fall sharply when global prices drop, reducing farmers' incomes.
• Dumping: Foreign producers may sell goods below cost in another country to capture the market, which harms local producers.
• Balance of payments pressure: Imports that exceed exports create a deficit that drains foreign currency reserves and may force the country to borrow.
• Loss of local culture and over-exploitation of resources: Heavy export demand can strain land and water, and foreign goods and habits can weaken local traditions.

Chapter Summary

This chapter explored the concept of international trade, beginning with its meaning as the exchange of goods and services across national borders. The discussion highlighted both the advantages, such as access to a wider variety of products and economic growth, and the disadvantages, including dependency and exposure to global market fluctuations. The chapter then examined the international balance of payments, a critical accounting framework that records all economic transactions between residents of a country and the rest of the world. Within this context, the international balance of trade was defined as the difference between the value of exports and imports. Lastly, the international terms of trade were analyzed, illustrating how the relative prices of exports and imports affect a country’s economic well-being. Together, these topics provide a comprehensive understanding of how international trade functions and its impact on national economies.