INTERNATIONAL TRADE
DEFINITION
International trade is the exchange of capital, goods, and services across international borders or territories, which could involve the activities of the government and individual. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout history, its economic, social, and political importance has been on the rise in recent centuries.
We can also say...
Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entrepot. The inflow of goods in a country is called import trade whereas outflow of goods from a country is called export trade. Many times goods are imported for the purpose of re-export after some processing operations. This is called entrepot trade. Foreign trade basically takes place for mutual satisfaction of wants and utilities of resources.
(For example in United States)
PRESENTATION
TYPES OF FOREIGN TRADE
Foreign Trade can be divided into following three groups:
Import Trade : Import trade refers to purchase of goods by one country from another country or inflow of goods and services from foreign country to home country.
Export Trade : Export trade refers to the sale of goods by one country to another country or outflow of goods from home country to foreign country.
Entrepot Trade : Entrepot trade is also known as Re-export. It refers to purchase of goods from one country and then selling them to another country after some processing operations.
NEED AND IMPORTANCE OF FOREIGN TRADE
1. Division of labour and specialisation
Foreign trade leads to division of labour and specialisation at the world level. Some countries have abundant natural resources. They should export raw materials and import finished goods from countries which are advanced in skilled manpower. This gives benefits to all the countries and thereby leading to division of labour and specialisation.
2. Optimum allocation and utilisation of resources
Due to specialisation, unproductive lines can be eliminated and wastage of resources avoided. In other words, resources are channelised for the production of only those goods which would give highest returns. Thus there is rational allocation and utilization of resources at the international level due to foreign trade.
3. Equality of prices
Prices can be stabilised by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilises the prices, making allowances for transport and other marketing expenses.
4. Availability of multiple choices
Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world.
5. Ensures quality and standard goods
Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries have to keep up the quality of goods. Thus quality and standardised goods are produced.
6. Raises standard of living of the people
Imports can facilitate standard of living of the people. This is because people can have a choice of new and better varieties of goods and services. By consuming new and better varieties of goods, people can improve their standard of living.
7. Generate employment opportunities
Foreign trade helps in generating employment opportunities, by increasing the mobility of labour and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. Such as Industry, Service Sector (insurance, banking, transport, communication), etc.
8. Facilitate economic development
Imports facilitate economic development of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector.
9. Assitance during natural calamities
During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods. Foreign trade enables a country to import food grains and medicines from other countries to help the affected people.
10. Maintains balance of payment position
Every country has to maintain its balance of payment position. Since, every country has to import, which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.
11. Brings reputation and helps earn goodwill
A country which is involved in exports earns goodwill in the international market. For e.g. Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic goods.
12. Promotes World Peace
Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer due to economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves.
CHARACTERISTICS OF INTERNATIONAL TRADE
a) Separation of Buyers and Producers:
In inland trade producers and buyers are from the same country but in foreign trade they belong to different countries.
b) Foreign Currency:
Foreign trade involves payments in foreign currency. Different foreign currencies are involved while trading with other countries.
c) Restrictions:
Imports and exports involve a number of restrictions but by different countries. Normally, imports face many import duties and restrictions imposed by importing country. Similarly, various rules and regulations are to be followed while sending goods outside the country.
d) Need for Middlemen:
The rules, regulations and procedures involved in foreign trade are so complicated that there is a need to take the help of middle men. They render their services for smooth conduct of trade.
e) Risk Element:
The risk involved in foreign trade is much higher since the goods are taken to long distances and even cross the oceans.
f) Law of Comparative Cost:
A country will specialise in the production of those goods in which it has cost advantage. Such goods are exported to other countries. On the other hand, it will import those goods which have cost disadvantage or it has no specific advantage.
g) Governmental Control:
In every country, government controls the foreign trade. It gives permission for imports and exports may influence the decision about the countries with which trade is to take place.
MIDDLEMEN IN INTERNATIONAL TRADE
There are a number of middlemen in international trade. Because of complex and intricate procedures in foreign trade the role of middlemen is very important. Middlemen have become almost a necessity in international trade.
Middlemen in Importing Country...
a) Clearing Agents:
A clearing agent is appointed by an importer. He completes various formalities when goods reach the port. He gets the goods cleared by observing customs formalities and then despatches them to the destination of the importer either by road or by rail as the case may be. A clearing agent charges a commission for his services.
b) Import Agent:
An import agent acts on behalf of the wholesaler. He completes the complicated procedures involved in importing goods on behalf of the wholesaler. He gets a fixed commission for his services and the risk involved in the business is to be borne by the wholesaler. An import agent has a specialised knowledge of the goods in which he deals.
Middlemen in Exporting Country:
a) Export Agent:
He acts on behalf of the international buyer. He collects goods as per the instructions of the international buyers and despatches them these goods after completing various formalities. He charges commission as per the agreement for his services.
b) Forwarding Agents:
Forwarding agent is appointed by the exporter to act on his behalf. He performs various export formalities and arranges for the export of goods and charges commission as per agreement.
c) Shipping Company:
A shipping company may also act as an agent of the exporter. It despatches goods to the country of the importer by collecting them from the exporter.
SPECIAL DIFFICULTIES AND PROBLEMS IN INTERNATIONAL TRADE
International trade is more complicated as compared to home trade of a country. There are many difficulties which are faced by a trader engaged in international trade.
The following are the problems or difficulties...
a) Distance:
Usually, international trade involves long distances. Distance between various countries is a great difficulty in an International trade. Due to long distances, it becomes difficult to establish close relationship between the buyers and the sellers.
b) Diversity of Languages:
Different languages are spoken and written in different countries of the world. The difference of language creates another problem in the international trade. It becomes difficult to understand the language of traders in other countries. All correspondence has to be done in foreign language.
c) Transport and Communications:
Long distances in international trade create difficulties of proper and quick transport and communication. Both of these involve considerable delay as well as cost. The high cost of transport is a great hindrance in international-trade.
d) Risk and Uncertainty:
International trade is subject to greater risk and uncertainties as compared to home trade. As the goods have to be transported to long distances, they are exposed to many risks. Goods in transit overseas are susceptible to the perils of the sea. These risks may be covered through marine insurance, but this involves extra cost in foreign trade transactions.
e) Lack of information about International Traders:
In international trade, since there is no direct and close relationship between the buyers and the sellers, the seller has to take special steps to verify the creditworthiness of the buyer. It is difficult to obtain information regarding creditworthiness, business standing and financial position of persons living in foreign countries.
f) Import and Export Restrictions:
Every country has its own laws, customs and import and export regulations. Exporters and importers have to fulfill all the custom formalities as well as follow rules controlling exports and imports.
g) Difficulties in Payments:
International trade involves the exchange of currencies because the currency of one country is not the legal tender in the other country. Exchange rates are determined for different currencies for this purpose. But exchange rates go on fluctuating.
Moreover there is a wide gap between the time when the goods are despatched and the time when the goods are received and paid for. Thus, there is a greater risk of bad debts also in foreign trade. Remittances of money for payments in foreign trade are time-consuming and expensive. Hence, payments in foreign trade create complications.
h) Various Documents to be used:
Foreign trade involves the preparation of a large number of documents both by the importer as well as the exporter. These documents may be required either under law or under customs of trade of the two countries.
i) Study of Foreign Markets:
Every foreign market has its own characteristics. It has own requirements, customs, traditions, weights and measures, marketing methods, etc. An extensive study of foreign markets is required to be successful in foreign trade, which may not be possessed by an ordinary trader
