Chapter 10: Understand International trade

International trade is a fundamental aspect of modern business management, especially in Kenya’s increasingly globalised economy. Understanding how businesses engage in cross-border exchange of goods and services equips managers with the skills to navigate competitive markets, leverage comparative advantages, and expand their operations beyond national boundaries. This chapter explores the essential concepts and economic indicators that underpin international trade, which are critical for strategic decision-making in business management roles.

10.1 Concept of international trade

International trade is the exchange of goods and services between people, firms and governments in different countries. It matters to a business manager because it decides where a firm can buy its inputs, where it can sell its output and which foreign competitors it will meet at home. A Kenyan exporter of cut flowers, an importer of construction machinery and a firm that sells software services to a foreign client are all taking part in international trade, and each is affected by exchange rates, import duties and the trade policies of the countries involved. This topic explains what international trade is, why countries engage in it and what it gains and costs a country and its businesses.

10.1.1 Meaning

International trade means the buying and selling of goods and services across national borders. Goods or services sold to another country are exports, and goods or services bought from another country are imports. It differs from domestic trade because the parties use different currencies, work under different laws and customs rules, and face transport, documentation and risk that local trade does not. Example: a tea exporter in Kericho sells tea to a buyer overseas and is paid in a foreign currency, while a hardware importer in Nakuru buys power tools from a foreign manufacturer and pays duty when the goods enter Kenya.

Components of international trade

• Trade in goods: Physical products such as tea, coffee, cut flowers, textiles, machinery and fuel cross borders and are counted in customs records. This is called visible trade.
• Trade in services: Intangible services such as tourism, transport, insurance, banking and software development are sold across borders. This is called invisible trade.
• Capital flows: Investments and loans move between countries to build factories, farms and infrastructure that support trade.
• Technology transfer: Technical knowledge and equipment move between firms through trade, licensing and partnerships.
• Movement of skilled labour: Professionals who work abroad or serve foreign clients take part in the trade in services.

Why countries trade

No country has all the resources, skills and climate to produce everything its people need at a low cost. Each country therefore specialises in what it can produce best and trades for the rest. Several theories explain the pattern.

• Absolute advantage: A country has an absolute advantage when it can produce a good using fewer resources than another country. The idea comes from Adam Smith. Kenya's climate and altitude give it an advantage in tea and cut flowers.
• Comparative advantage: A country has a comparative advantage in the good whose opportunity cost is lower, even if it is more efficient than its partner in everything. The idea comes from David Ricardo, and it explains why trade benefits both sides.
• Factor endowments: The Heckscher-Ohlin theory states that countries export goods that use their plentiful factors of production, such as land or labour, and import goods that use their scarce factors.
• Product life cycle: A new product is first made and sold in the country where it was invented. As it becomes standard, production moves to countries where it can be made at a lower cost and trade flows change.
• New trade theory: Large-scale production lowers unit costs and brands differ, so countries may export and import similar products to each other.

The comparative advantage idea is shown by the opportunity cost of each good in two countries. Suppose one worker in a day can produce the following.

Kenya produces more of both goods, so it has the absolute advantage in both. Its opportunity cost of tea (0.67 of a shirt) is lower than Country B's (1 shirt), so Kenya has the comparative advantage in tea. Country B gives up less tea per shirt (1 kg against 1.5 kg), so it has the comparative advantage in shirts. Both gain when Kenya specialises in tea and Country B in shirts and they trade.

10.1.2 Advantages and disadvantages

International trade gives a country and its businesses access to markets, inputs and ideas beyond their borders, but it also exposes them to foreign competition and to events they do not control. A manager weighs both sides before deciding to export, import or source from abroad. Example: a garment maker that exports shirts to a neighbouring country grows its sales, but must also cover freight, customs paperwork and changes in the exchange rate.

Advantages of international trade

• Competition and quality: Exposure to foreign competitors pushes local firms to cut costs and improve quality.
• Larger markets: A firm that sells abroad is not limited by the buying power of the home market and can produce in larger quantities at a lower unit cost.
• Access to inputs and goods: Machinery, fuel, raw materials and products that are not made locally can be bought from abroad.
• Lower costs and wider choice: Buyers find goods at lower prices and in greater variety because producers in different countries compete.
• Foreign exchange earnings: Export sales bring in foreign currency that pays for imports and supports the value of the shilling.
• Specialisation and efficiency: Each country concentrates on what it produces best, so world output is higher than it would be if every country tried to produce everything.
• Technology and skills: Contact with foreign firms and equipment spreads new methods and knowledge.
• Spread of risk: A firm that sells in several countries is less hurt when demand falls in one.

Disadvantages of international trade

• Foreign competition: Cheaper imports can take customers from local firms, especially young industries that have not yet grown large.
• Dependence on other countries: A country that relies on imported fuel, food or machinery is exposed to price rises and supply breaks abroad.
• Exchange rate risk: A change in the value of the shilling can raise the cost of imports or lower the income from exports between the date of the order and the date of payment.
• Trade barriers: Tariffs, quotas and standards set by other countries can shut a firm out of a market it has built.
• Costs and complexity: Freight, insurance, customs clearance and compliance with foreign rules add cost and delay.
• Dumping and harm to local industry: Goods sold abroad below their cost of production can drive local producers out of business.
• Overspecialisation: A country that depends on one or two exports suffers when their world prices fall.
• Political and economic risks: Unstable trade policies, sanctions or conflict in a partner country can stop orders or payments.

Role of international trade in Kenya's economic development

International trade supports growth, jobs and industry in Kenya. The national development blueprint, Vision 2030, aims to raise exports and attract foreign investment so that businesses become more competitive. Cut flower, tea and coffee exports earn foreign exchange and create work on farms, in packing houses and in transport.

• Employment creation: Export-oriented firms provide direct jobs, and their suppliers and transporters provide indirect jobs.
• Economic growth: Trade widens the market, so output and incomes can rise beyond what local demand could support.
• Infrastructure development: Busier ports, roads and railways are built and maintained where trade volumes are high.
• Diversification: Trade in new products and markets reduces the economy's reliance on a few traditional exports.
• Regional integration: Membership of the East African Community gives Kenyan firms wider access to the markets of its partner states.

Chapter Summary

International trade refers to the exchange of goods and services across national borders, enabling countries to access products they do not produce domestically. This trade brings several advantages such as increased market access, economic growth, and the opportunity for specialization, while also posing disadvantages including dependency risks and trade imbalances. The international balance of payments records all economic transactions between a country and the rest of the world, reflecting the overall economic health and external financial position. Within this framework, the international balance of trade focuses specifically on the difference between exports and imports of goods and services. International terms of trade measure the relative prices of exports compared to imports, indicating the purchasing power of a country's exports in acquiring foreign goods. Understanding these concepts is essential for analyzing how countries interact economically and manage their external economic relationships.