Definition of International Trade: According to Encyclopedia simply defines international trade as,
“Exchange of goods and services between countries. It is distinguished from domestic trade which takes place completely within a single country.
There is no country in the world today that produces all the commodities it needs (i.e) entirely self-sufficient. Every country, therefore, buys the needed commodities from other countries. So, the requirements of different countries for various commodities gave rise to the idea of international trade.
The period of world war 2 witnessed multiple growths in the products both industrial and agricultural, an increase in world population, and a major increase in the volume and value of international trade.
It is estimated that during the period between 1950 & 1970 international trade expanded at least five times. Nowadays every year a total trade of 3.5 trillion $ occurs across the international border. The volume of international trade would increase more as time passes.
Types of International Trade:
There are mainly two types of international trade.
A. Inter-Regional Trade:
It is a trade between the regions of a country. It is also called inter-local trade or in general terms domestic trade.
B. International Trade:
It is trading between two or more countries of the world.
Basis and Nature of International Trade:
The fundamental basis of international trade lies in the fact that countries are endowed by nature with different elements of productive powers.
In other words, endowment factors are evenly distributed among the countries of the world. For example, the Middle East States are rich in crude oil, and Australia is endowed with stretches of land with a comparatively small population.
Some countries like US, Germany, and Japan possess an abundance of advanced manufacturing capacities, plenty of capital, and skilled manpower. This is due to geographical facts, physical features, and climatic differences.
International trade is inevitable where there are market differences in the countries regarding materials, climate, soil, and other physical and geographical conditions.
International trade is also affected by several other factors besides the natural or geographical factors (e.g) stage of economic development, accumulation of capital by a nation and its foreign investment, technology progress, trade, financial regulations, Political affiliations, and so on.
Techniques of Trade:
To avoid dependence and to maximize independence is to avoid trading altogether and to produce everything one needs by itself, such a strategy is known as self-sufficiency or autarky.
The theory of comparative advantage has proved such a policy ineffective as self-reliant states pay a very high price to produce goods for which it does have a comparative advantage.
In practice when states adopt such a policy they indeed lag behind others.
Although few states pursue a strategy of autarky, many states try to manipulate international trade in such a way as to strengthen one or more domestic industries and shelter them from the world market, such policies are broadly known as protectionism.
It is another important strategy of international trade. Tariffs consist of import or export duties, goods coming into or going out of the country respectively.
Tariffs not only restrict imports but also can be an important source of state revenues as well. If a state is going to encourage protectionism. International norms favor tariffs as the preferred method of protectionism because they are straightforward and not hidden.
4. Non-Tariff Barriers (NTBs):
Another means to discourage imports can be NTBs. So in such cases production is provided to home markets not through tariffs but through certain other laws such as, “quota” and “Anti-dumping laws” not allowing certain commodities to exceed a particular number.
Advantages of International Trade:
Just as domestic or internal trade benefits both sellers and buyers. In the same way, international trade benefits all countries participating in international trading transactions. These advantages are as follows.
1. Benefit of International Specialization:
International trade promotes specialization on the basis of comparative advantage. That is if a country is endowed with some special resources or facilities in the form of either natural resources, capital equipment, skilled labor, or entrepreneurial ability, and it exports its goods and services and imports others goods and services which they have a comparative advantage, so it will ensure the participated countries the availability of goods at the cheaper price then if the country were to try to produce those within the country itself.
2. Cheaper Prices:
International specialization and the possibility of exporting goods to other countries make possible large-scale production of goods and therefore their production at a lower cost due to large-scale production.
International trade enables people of the world to get a large variety of goods at cheaper prices than if the country were to try to produce these goods itself.
3. A Source of Employment:
International trade opens the entire world markets for goods produced in a country. Thus, international trade by expanding the size of markets becomes a source of employment for people around the world.
4. Transfer of Capital & Technical Know-How:
International trade includes the transfer of capital and technical know-how. This helps the backward or developing states in their rapid economic development and alleviation of mass poverty in those states. It also exposes those states to technical developments that are taking place in developed states.
Factors Determining Gains From International Trade:
In the twenty-one century, liberal economies have been very successful due to substantial gains which can be realized through trade. These gains results reasons are following.
1. Comparative Advantage:
In comparative advantage, states provide things in which they have an advantage over other two important commodities in the world economy (i.e) oil and cars.
We understand that it is much cheaper to produce oil in Saudi Arabia while Japan would be in a better place by producing cars. Japan needs oil to run its industries and Saudi Arabia needs cars to get around its vast territories. International trade increases the overall efficiency of production.
2. Terms of Trade:
These are different measures of terms of trade and each represents a different concept. The important measure among them are;
1. Barter Terms of Trade:
It is a ratio of export price to import price.
2. Income Terms of Trade:
It measures the import capacity of the country. It is defined as export receipt deflation import price. Following are the factors on which the terms of trade of a country may depend.
- Elasticity of demands
- Elasticity of supply
- Availability of substitutes
- Size of demand
- Rate of exchange
3. Balance of Trade:
It is the difference between the values of exports and imports of physical items of a country during a given period of time. If the value of commodity exports exceeds the value of commodity imports, the balance of trade is said to be favorable and it is called the positive balance of trade or trade surplus.
If the value of imports of a country exceeds the value of exports in a given period of time, the balance of trade is said to be unfavorable and it is called the negative balance of trade or trade deficit.
When a state depends for its well-being on another it is called dependent on the first one and when two or more states are dependent on each other they are called interdependent.
In international political economy, interdependence refers more to a multilateral mutual dependence which is important for keeping world markets operating efficiently.
Hurdles to International Trade:
Just as there are several motivations for protectionism, governments also use several methods to restrict imports. Some of the restrictions are as follows:
1. Import Prohibition:
Sometimes imports of certain commodities are prohibited by law or allowed only under certain conditions, for instance, there is sanitary regulation (e.g) the US government once excluded beef from a certain region in Argentina where foot and mouth had attacked cattle.
2. Exchange Control:
It implies government interference with the buying and selling of foreign exchange. In this way, foreign trade is driven into fixed channels.
3. Tariffs and Custom Duties:
Tariffs consist of comparing import or export duties on goods coming into or going out of the country respectively. Tariffs not only restrict imports but can also be an important source of state revenue as well.
4. Preferential Treatment:
Sometimes discrimination is made in the rate of duties with regard to different states. It is generally known as preferential treatment.
5. Non-Tariff Barriers:
One another means to discover imports can be NTBs to trade. Imports can be limited by a quota or anti-dumping law.
6. Import Licences:
Under this system, the government doesn’t allow the import of certain goods without a license being obtained by the importer. In this way, imports can be suit down.
7. Import Subsidies:
The government may make the import of goods a state monopoly, as Russia does and they reduce imports or discriminate against certain countries.
Subsidies are given to the industry to help it survive in competition from abroad. It helps an industry to lower its prices and costs. Struggling to get established or facing strong foreign competition or it can make loans on favorable terms to companies in the threatened industry.
Role of Trade in International Relations:
Trade has got a most important place in contemporary international relations. International trade amounts to about 15% of the total production of goods and services in the world.
Around 3.5 trillion $ worth of trade occurs across international borders. The great volume of international trade reflects the fact that the role of trade is profitable in the economic values. It is at least important in 3rd world region or in the industrialized regions of the world.
Third-world economic activities are less. It contributes about 20% of world trade. This creates a symmetrical dependence in the North-South trade.
Moreover, norms of political activities related to trade are concentrated in the industrialized west, which accounts for 75% of all international trade.
International Trade & Economic Development:
There are many ways by which trade can contribute to the economic development of developing states.
- Utilization of natural resources trade can lead to the full utilization of domestic resources i.e through trade a developing nation is provided with an outlet for its potential surplus of agricultural commodities and raw materials e.g South East Asia and West Africa.
- International trade is the vehicle for the transformation of new ideas, new technologies, and new skills.
- Trade also stimulates the international flow of capital from developed to developing states.
- In several large developing nations such as Brazil and India, the important portion of newly manufactured products has been stimulated.
- International trade is an excellent anti-monopoly weapon because it stimulates effectively domestic producers to meet foreign competition.
It becomes very obvious that international trade is inevitable for the progress and economic development of any country.
In this interdependent world, every state is dependent on others for developing economically and industrially. Nature has bestowed some countries with some rare materials.
These scare materials are equally distributed among the states of the world. Through international trade, it increases national income and facilities savings and opens out new channels of investment that promote economic growth.
What is meant by international trade?
International trade means the exchange of goods and services by companies in different countries of the world. A country may purchase or sell consumer goods, food, machinery, and raw materials from other countries.
What are the major benefits of international trade?
6 Key Benefits of International Trade:
Source of Employment
Transfer of Capital and Know-how
Cordial relations between countries
Expanding Target Markets
What are the barriers to international trade?
The main barriers to international trade are:
Tariffs and Custom Duties