Invisible Trade: What It Means and Examples

Invisible trade is the international exchange of services, often lacking a tangible form. This is different from visible trade, which involves physical goods. Global financial services and insurance companies, shipping services, and tourism all engage in invisible trade.

What Is Invisible Trade?

The term invisible trade refers to the international exchange of intangible services between two countries. Put simply, an invisible trade occurs when one country buys or sells services of value to or from another nation. It is the opposite of visible trade, which involves the exchange of physical goods between countries. Customer service outsourcing, overseas banking transactions, and the medical tourism industry all are examples of invisible trade.

How Invisible Trade Works

As noted above, invisible trade involves importing and exporting of intangible services between international businesses and governments. These services do not have a physical presence but do have a monetary value. It's important to note that services make up the majority of invisible trade rather than physical goods.

The purchase of an insurance policy by a firm in one country from a company in another country is such a transaction. Invisible trade also describes a bank's income from its overseas branch offices, income from foreign investments, shipping services, tourism revenues, and consultant fees from international contracts.

Any accounting of a nation's balance of trade (BOT) must include a calculation of its invisible trade. A country's balance of trade is the difference between the values of its exports and imports. Accounting for invisible trade, which is often referred to as the invisible balance, must be done because the services involved have a monetary value.

Unique Aspects of Invisible Trade

Certain products and services fall somewhere between the visible and invisible trade definitions. A medical tourist who flies home after knee replacement surgery is bringing something home, after all. The customer of an international insurance company is getting a policy.

Accountants need to count. A nation's trade balance is calculated by tracking imports and exports, and payments and receipts. Much of the business of invisible trade falls outside the usual sources of this data.

Invisible Trade vs. Visible Trade

As noted above, invisible trade involves the exchange of intangible products—normally services. Visible trade, on the other hand, involves the international exchange of physical goods. This means that physical or tangible goods are traded between nations This includes things like:

• Consumer goods (clothing, smartphones, toys)
• Commodities and raw materials (oil, gas, wheat)
• Food and beverages
  
• Currencies
• Water
• Livestock
• Stocks and bonds

Together, Invisible and visible trade make up a country's trade balance.

Common Examples of Invisible Trade

Education is a form of invisible trade. Students might travel to other nations to study at prestigious institutions like Oxford or Harvard. Once they graduate, they might stay in that country or go home. If they go home, they transfer their knowledge and expertise across borders in another intangible exchange.

The medical travel and tourism industry has become a significant factor in invisible trade. This happens when patients travel to other countries to get specialized medical procedures, higher-quality healthcare, or lower-cost services.

Not all invisible trade represents a private business venture. Foreign aid is an example, as are international emergency relief efforts. Foreign loans and the payments of interest on those loans are counted as invisible trade. So are many individual transactions, such as an immigrant sending money to family members at home.

Other services that make up invisible trade include:

• Banking
• Consultancy
• Customer service
• Intellectual property
• Freight, shipping, and transport
• International investment income
  

The Bottom Line

Trade keeps the economy moving. Most people equate trade to the exchange of physical goods like consumer products and raw materials. But it also includes the exchange of intangible services, which don't have a physical presence. Services like banking, customer service outsourcing, and tourism make up a big part of a country's invisible trade. Although they can't be held physically, they do have a major impact on a nation's economy.