International Trade Vocabulary in English

Both tariffs and quotas are tools governments use to restrict imports, but they work differently. A tariff is a tax added to the price of an imported good, making it more expensive for consumers and thus less competitive against domestically produced goods. A quota is a physical limit on the quantity of a good that can be imported during a specific period — once the limit is reached, no more of that product can enter the country. Tariffs generate revenue for the government; quotas do not. Both are considered forms of protectionism.

Comparative advantage is one of the most important concepts in economics. It means that a country should specialise in producing the goods or services it can produce at a lower opportunity cost than other countries, even if another country can produce everything more efficiently in absolute terms. For example, if Country A is better at making both wine and cloth, but is relatively better at wine, and Country B is relatively better at cloth, then both countries benefit if A specialises in wine and B in cloth and they trade. This theory, developed by David Ricardo in 1817, underpins the economic case for free trade.

A trade deficit occurs when a country’s imports exceed its exports in value over a given period, meaning more money flows out of the country to pay for foreign goods than flows in from selling goods abroad. A trade surplus is the opposite — exports exceed imports and more money flows in. A persistent trade deficit is not necessarily harmful (the UK has run one for decades while remaining a wealthy country), but it can indicate that a country is borrowing from abroad to fund consumption. A surplus indicates that a country is a net lender to the rest of the world.

The World Trade Organization (WTO) is an international organisation founded in 1995 that sets and enforces the rules of trade between its 164 member nations. Its main functions are to negotiate trade agreements that reduce barriers to trade, to monitor members’ compliance with those agreements, and to provide a formal dispute settlement system for resolving trade conflicts between countries. The WTO operates on principles of non-discrimination — most notably the Most Favoured Nation (MFN) rule, which says that any trade advantage given to one member must be extended to all others.

Protectionism is the policy of restricting imports to shield domestic industries from foreign competition. Arguments in favour include protecting jobs in industries that would otherwise be undercut by cheaper foreign production, protecting “infant industries” until they are competitive, and maintaining strategic sectors for national security. Arguments against include higher prices for consumers, reduced efficiency, risk of retaliation by trading partners, and the fact that it ultimately reduces overall economic welfare by preventing countries from specialising according to comparative advantage.

A free trade agreement (FTA) is a treaty between two or more countries that reduces or eliminates tariffs, quotas, and other barriers to trade between the parties. FTAs may also cover services, investment, intellectual property, and regulatory cooperation. Unlike a customs union (such as the EU), an FTA does not require members to adopt common external tariffs with non-member countries — each member sets its own trade policy with the rest of the world. The UK has been negotiating FTAs with various countries since leaving the EU’s single market in 2020.

Dumping occurs when a company or country exports goods to a foreign market at a price below the cost of production or below the domestic price in the exporting country. It is considered an unfair trade practice because it can drive local competitors out of business, after which the exporter may raise prices once competition has been eliminated. The WTO permits countries to impose anti-dumping duties on dumped goods to offset the price difference, provided they have evidence that dumping has occurred and that it is causing or threatening to cause material harm to domestic industry.

Foreign direct investment (FDI) occurs when a company or investor in one country makes an investment in a business or asset in another country with the aim of gaining a lasting interest and significant degree of influence over its operations. This is different from simply buying shares on a foreign stock exchange. Examples include a UK car manufacturer opening a factory in Mexico, or a Chinese company acquiring a British pharmaceutical firm. FDI is important because it transfers not just money but also technology, management skills, and market access to the recipient country.

Non-tariff barriers (NTBs) are trade restrictions that do not take the form of a tax. They include quotas, import licences, technical standards and regulations, sanitary and phytosanitary measures, customs procedures, and subsidies to domestic producers. NTBs have become increasingly important as average tariff rates have fallen: countries sometimes use complex regulations, differing standards, or lengthy customs procedures to make it difficult for foreign goods to enter their markets. Identifying and reducing NTBs is now a central focus of international trade negotiations.

Incoterms (International Commercial Terms) are a set of standardised trade terms published by the International Chamber of Commerce (ICC) that define exactly who — the buyer or the seller — is responsible for each aspect of an international shipment: transport costs, insurance, customs clearance, and the risk of loss or damage at each point in the journey. By agreeing on a specific Incoterm (such as FOB, CIF, or DDP), trading parties from different countries with different legal systems can use a shared, internationally recognised framework, reducing misunderstandings and disputes. Incoterms are updated periodically; the current edition is Incoterms 2020.