Global business and trade

Very few businesses are untouched by international trade. A café imports coffee beans, a farmer sells canola or soybeans abroad, a software company serves customers on several continents and nearly every retailer sells goods made in other countries. This lesson explains why countries trade, how trade is measured, how exchange rates affect businesses, the ways firms enter foreign markets, trade barriers and agreements, and the trade environment at the time of writing (October 2026), which has been unusually turbulent.

Why countries trade

Countries trade for the same reason people do: specialization makes everyone better off. A country has an absolute advantage in a good if it can produce more of it with the same resources. More importantly, it has a comparative advantage if it can produce the good at a lower opportunity cost, that is, by giving up less of other goods. Economist David Ricardo showed two centuries ago that even if one country is better at producing everything, both countries gain when each specializes in what it does relatively best and trades for the rest.

Trade also gives consumers more variety and lower prices, lets firms reach larger markets and achieve economies of scale, and spreads technology and ideas. The gains are not evenly shared, though: workers and communities in industries that face new import competition can lose jobs, which is why trade policy is politically contentious.

Measuring trade

Exports are goods and services sold to other countries; imports are goods and services bought from them. The balance of trade is exports minus imports. A trade surplus means exports exceed imports; a trade deficit means the reverse. The broader current account adds investment income and transfers. A deficit is not necessarily bad: a fast-growing country may import capital goods, and a country's deficit with one partner may be offset by surpluses with others.

Trade is important to the US economy, although it is a smaller share of GDP than in most other countries because the domestic market is so large. Canada and Mexico are the largest US trading partners, followed by China, the European Union, Japan and South Korea. The United States runs a large overall goods trade deficit but a surplus in services such as software, finance, travel and intellectual property.

Exchange rates

When businesses trade across borders, someone has to exchange currencies. The exchange rate is the price of one currency in terms of another. Exchange rates move with interest rates, inflation, commodity prices, economic growth and investor sentiment. A weaker home currency makes exports cheaper for foreign buyers and imports more expensive at home; a stronger currency does the opposite.

Ways to enter foreign markets

Firms can go international with different levels of commitment, cost, control and risk:

• Exporting: selling goods produced at home to foreign buyers, directly or through agents and distributors. Low risk and investment, but subject to tariffs and transport costs.
• Licensing: allowing a foreign firm to use a patent, trademark or technology in exchange for royalties. Low investment, but less control and the risk of creating a competitor.
• Franchising: licensing a whole business system, common in restaurants and hotels.
• Contract manufacturing and outsourcing: having a foreign firm produce goods or services to your specifications.
• Joint ventures and strategic alliances: sharing ownership, costs and control with a local partner who knows the market.
• Foreign direct investment: building or buying operations abroad, such as a plant or subsidiary. Highest control and potential return, and highest cost and risk.

A multinational corporation operates in many countries. Companies must also adapt to differences in culture, language, business customs, laws, tax and political risk. Hofstede's research, for example, found countries differ in attitudes to hierarchy, individualism, risk and long-term orientation, all of which affect management and marketing.

Trade barriers

Governments restrict trade for several reasons: to protect domestic industries and jobs, to raise revenue, to protect national security, or to retaliate against other countries' policies. The main barriers are:

• Tariffs: taxes on imported goods, usually a percentage of their value. They are paid by the importer, and much of the cost is typically passed on to buyers.
• Quotas: limits on the quantity of a good that can be imported.
• Embargoes and sanctions: bans on trade with certain countries or in certain goods.
• Non-tariff barriers: product standards, licensing requirements, buy-local rules, subsidies to domestic producers and slow customs procedures.

Trade agreements and organizations

The World Trade Organization (WTO), with 166 members, sets rules for trade between countries, provides a forum for negotiations and settles disputes; its appeals body has been unable to function since 2019, weakening dispute settlement. Regional and bilateral free trade agreements reduce or eliminate tariffs among members.

The United States' most important regional agreement is the United States–Mexico–Canada Agreement (USMCA), which replaced NAFTA in 2020. The United States also has free trade agreements with about 20 countries, including South Korea, Australia, Chile and several Central American countries, but it is not a member of the CPTPP or a comprehensive agreement with the European Union.

The trade environment at the time of writing

US trade policy has changed rapidly since early 2025. At the time of writing (October 2026), the main developments are these. In February 2026, the Supreme Court ruled in Learning Resources v. Trump that the International Emergency Economic Powers Act does not authorize tariffs, ending the tariffs imposed under that law. Tariffs under Section 232 on steel, aluminum, autos and parts, lumber and other goods, and under Section 301 on many imports from China, remain in place, and a temporary global tariff was imposed under Section 122 of the Trade Act of 1974 in February 2026, a measure limited to 150 days unless Congress extends it, with USMCA-qualifying goods largely exempt. At the USMCA joint review on July 1, 2026, the United States declined to extend the agreement for a new 16-year term, which triggers annual reviews; the agreement remains in force until 2036 unless the parties agree otherwise. Importers have responded by checking rules of origin, diversifying suppliers and building tariff scenarios into their pricing. Because trade policy is changing quickly, always check the latest rules before quoting a price or signing a contract.

Practical steps for a first-time exporter

A small firm thinking about selling abroad can reduce risk by starting with one nearby or familiar market, researching demand and competitors there, confirming the tariff classification and any duties, checking product standards and labeling rules, choosing a reliable distributor or online channel, agreeing clear Incoterms and payment methods such as letters of credit or export credit insurance, and pricing to cover freight, duties and currency risk. Government trade services can help with market research, contacts and financing.

Global business also raises ethical questions, such as working conditions at overseas suppliers, bribery and environmental standards. Firms that source abroad increasingly audit suppliers and publish codes of conduct, a subject the next lesson takes up.