Foreign or international trade can be considered a number of different things, depending on the type of trade one is talking about. Generally speaking, it is trading goods and services that are destined for a country other than their country of origin. Foreign trade can also be investing in foreign securities, though this is a less common use of the term.
Foreign trade is all about imports and exports. The backbone of any trade between nations is those products and services which are being traded to some other location outside a particular country's borders. Some nations are adept at producing certain products at a cost-effective price. Perhaps it is because they have the labor supply or abundant natural resources which make up the raw materials needed. No matter what the reason, the ability of some nations to produce what other nations want is what makes international trade work.
In some cases, the products produced in a foreign trade situation are very similar to other products being produced around the world, at least in their raw form. Therefore, these products, known as commodities, are often pooled together in one mass market and sold. This is called trading commodities. The most common commodities often sold in foreign trade are oil and grain.
There are a number of issues with imports and exports that must be taken into consideration when conducting foreign trade. For example, some countries have industries they may want to protect. These industries may be in competition with foreign companies for the opportunity to sell products domestically. To protect domestic trade, countries may institute tariffs, which are taxes on certain foreign goods. While this is a way to generate revenue, its real value lies in helping those domestic companies.
For example, to encourage domestic production of ethanol in the United States, a tariff has been imposed on Brazilian ethanol. This protects the ethanol market in the United States, which would not otherwise be able to compete with Brazilian ethanol based on cost. In Brazil, ethanol is made from sugar, which produces far more ethanol gallons per acre than corn, the primary crop used for ethanol in the United States.
In addition to tariffs, currency issues are another factor in foreign trade. Some companies selling products overseas prefer to be paid in a certain type of currency, such as the US Dollar or Euro. This protects the company in case the country involved in a trade experiences a rapid devaluation in currency. Most foreign trading agreements will always involve a relatively stable currency.
