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20 October 2014
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    The Basics | More Information | Web Links
    What is trade?


    • Trade is about buying and selling - at your local market and between countries.

    • Trade links our lives to other people all over the world. We affect other people across the planet by what we buy in our local supermarket or department store.

    • Trade helps countries specialise in making what they can produce most efficiently. It enables them to earn the income to buy more of what other countries can make more efficiently.

    International trading systems

    How does trade between countries work?

    • Shops (and countries) need to make a profit. If no profit is made, there's no point in being in the business. They also need to protect themselves from being undercut; that is, other people selling the same goods to their customers at a cheaper price.

    • Often poorer countries produce raw materials, such as cotton or crops. Workers in poorer countries are paid lower wages than people here. This is because their cost of living is cheaper.

    • Since workers are paid less, companies are able to sell the cotton (or the finished product, such as a t-shirt) much cheaper than we can in the UK. We don't grow cotton and our workers want more money.

    • If all countries are free to trade their goods at the price it costs to produce them, the people from the poor countries will sell a lot more cheap t-shirts than we can produce in Britain.

    • This isn't good news for the factories here, because they want to sell t-shirts too. Consumers, retailers and distributors are more likely to go for the cheaper t-shirts made in poorer countries.

    What are tariffs?

    • Over the centuries we have developed systems where producers of goods from overseas have to pay a tariff. A tariff is a kind of tax added on to the price of imported goods

    How do tariffs work?

    • If a shoe shop has a choice of buying trainers made in the UK, which are expensive to produce, and cheaper trainers from overseas, they would normally buy the cheaper footwear.
    • To help British manufacturers sell more shoes to British shops, the government adds a tariff on imported shoes. This makes imported shoes more expensive. It's a way of making the prices higher, so that our own producers can compete and sell more of their own goods.

    What are subsidies?

    • Rich countries and groups of countries, such as the European Union, give their farmers help to produce their goods because it's so difficult for them to make money in agriculture. These are called subsidies.

    What are quotas?

    • Quotas limit the amount of goods or a certain product than can be imported. For example, the EU has a quota for the amount of sugar that can be imported from different countries into the region.

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