Chapter 10: Understand International trade

International trade is a fundamental aspect of the modern global economy and plays a crucial role in Kenya’s development across all sectors. It enables countries to access goods and services that are not produced domestically or are available at a lower cost abroad, thereby enhancing efficiency and consumer choice. For professionals in diverse fields such as retail, agriculture, finance, and tourism, understanding international trade helps in navigating supply chains, pricing strategies, and market opportunities. This chapter explores the core concepts of international trade, its measurement through balance of payments, and the implications of terms of trade for Kenya’s economic health.

10.1 Concept of international trade

International trade involves the exchange of goods, services and capital across national borders. It allows countries to specialise in what they produce at the lowest opportunity cost, which raises overall economic welfare. For Kenyan businesses, engaging in international trade opens access to broader markets, foreign technology and investment, which can enhance competitiveness and innovation. For a marketer it widens the market: a product can be sold to buyers abroad, and it competes with products brought in from abroad.

10.1.1 Meaning

International trade is the buying and selling of goods and services between countries. Goods and services sold to other countries are exports, and those bought from abroad are imports. A Kenyan horticulture grower who sells cut flowers to a foreign buyer is exporting, and a Kenyan trader who buys vehicles or machinery from a foreign supplier is importing.

The scope of international trade extends beyond tangible products to services such as tourism, transport, financial services and consultancy, all of which contribute significantly to Kenya's economy. Example: a safari operator that earns money from visitors from other countries is exporting a service, even though nothing physical crosses the border. A Kenyan training or consultancy firm that is paid by a foreign client is doing the same.

Types of international trade

International trade can be classified into several types, based on the nature of what is exchanged:

• Merchandise trade: the exchange of physical goods such as agricultural products, manufactured items and raw materials. Kenya's tea and coffee exports are examples of merchandise trade.
• Service trade: the exchange of intangible products such as shipping, consultancy, transport and tourism. Kenya's hospitality industry benefits from foreign tourists, which makes it a service export.
• Capital trade: cross-border investment, including foreign direct investment (FDI) and portfolio investment, which supports business expansion and infrastructure projects. FDI means a foreign investor owns and runs a business in the host country, while portfolio investment means holding shares or bonds without running the business.
• Intra-industry trade: countries exporting and importing similar types of goods at the same time, such as different varieties of textiles or electronics. It reflects specialisation within an industry.
• Barter trade: the direct exchange of goods without money, which is less common. It is sometimes used in specific bilateral agreements or by groups of farmers trading farm produce.

Factors influencing international trade

Several factors determine the volume and direction of international trade:

• Comparative advantage: countries export goods in which they have a lower opportunity cost of production, such as Kenya's specialisation in tea and coffee. They import goods that other countries make at a lower opportunity cost.
• Trade policies: tariffs, quotas and trade agreements influence market access and competitiveness. Kenya's membership of the East African Community (EAC) facilitates trade with partner states by reducing barriers.
• Exchange rates: changes in the value of the shilling against foreign currencies affect the shilling cost of imports and the price foreign buyers pay for exports.
• Infrastructure and logistics: efficient ports, roads, cold storage and communication networks reduce trade costs and improve Kenya's ability to compete internationally.
• Global demand and supply: changes in international market conditions, such as commodity prices, directly affect export earnings and import costs.

10.1.2 Advantages and disadvantages

International trade brings gains and costs, and both matter to firms deciding whether to export, to import inputs or to compete with imported goods. Example: a furniture workshop that imports hardware fittings gains a wider choice of material, but it also becomes exposed to changes in the exchange rate and to delays at the port.

Advantages of international trade

• Wider choice of goods and services: consumers and firms can buy things that are not produced locally, which improves consumer welfare. Kenyan traders can stock vehicles, machinery and electronics from abroad.
• Foreign exchange earnings: exports bring in foreign currency that pays for imported capital goods and raw materials needed in sectors such as manufacturing.
• Employment: export-oriented industries such as horticulture and tea farming create jobs, because they rely on international markets for sales.
• Technology transfer and innovation: exposure to global competition and new production methods pushes Kenyan firms to improve their products, packaging and processes.
• Government revenue: customs duties and taxes on traded goods contribute to public services and infrastructure development.
• Larger markets: a producer that can sell abroad is no longer limited by the size of the home market, so it can sell more and spread its sales over several markets.
• Specialisation and competition: each country concentrates on what it produces at the lowest opportunity cost, and competition from imports encourages local firms to keep prices reasonable and quality high.

Disadvantages of international trade

• Dependence on foreign suppliers and buyers: a country that relies heavily on imported fuel or inputs, or on a few export markets, suffers when supply is cut or demand abroad falls.
• Commodity price swings: exporters of farm produce and raw materials earn less when world prices drop, even if they produce the same quantity.
• Exchange rate risk: a weaker shilling raises the cost of imported inputs, while a stronger shilling makes exports dearer for foreign buyers.
• Pressure on local industry: young local firms may struggle to compete with established foreign producers, and jobs can be lost in industries that compete with imports.
• Dumping and low-quality goods: foreign sellers may sell goods at unusually low prices, or sell goods that fail quality standards, which undercuts local producers and puts buyers at risk.
• Strict standards and trade barriers: exporters must meet the quality, packaging, labelling and plant health rules of the buying country, and tariffs or quotas can close markets. A grower whose consignment fails inspection loses the sale.
• Over-specialisation: a country that puts most of its resources into a few products has fewer industries and jobs to fall back on when those products are no longer wanted.

Chapter Summary

International trade involves the exchange of goods and services across national borders, allowing countries to access products they do not produce domestically and to specialize in what they produce efficiently. The international balance of payments records all economic transactions between residents of a country and the rest of the world, reflecting the country's economic position globally. Within this framework, the international balance of trade specifically measures the difference between the value of exports and imports of goods and services, indicating whether a country has a trade surplus or deficit. The international terms of trade represent the ratio between export prices and import prices, showing how many units of exports are needed to purchase one unit of imports. Understanding these concepts is essential for analyzing a country’s economic health and the impact of global market changes. The chapter highlights the significance of maintaining favorable trade balances and terms of trade to support sustainable economic growth. It also emphasizes how shifts in these indicators can influence foreign exchange rates and national economic policies. Overall, the chapter provides a foundational understanding of how international trade functions and its critical role in the global economy.