18 International Trade: Concept and Overview

Shafali Nagpal

Objectives

After reading this module, students will be able to:

a) Understand what fosters the international trade

b) Know the Trends & Regulation of international trade

c) Advantages and Disadvantages

d) Evolution of International Trade

Introduction

All countries need goods and services to satisfy wants of their people. Production of goods and services requires various resources but every nation has limited resources.

No nation is self reliant or self sufficient. One nation cannot produce all the goods and services that it requires. It has to buy from it from other nations of the world which it cannot produce or produce less than its requirements. In the same way, a nation also sells its surplus production of goods and services to other countries. India too, buys from and sells to other countries various types of goods and services. It imports the goods which are not sufficiently produced or are demanded and exports the products which are in excess or are demanded by other nations.

This exchange of goods and services among the nations across the borders is called International trade. It is complex in nature. It involves currencies of different nations among which trade takes place and is regulated by various institutions, rules and laws.

International trade allows a nation to expand its markets for both goods and services that otherwise may not have been available. Due to international trade a consumer in India can enjoy a ride on American Car, Watches a television made in Japan, relish South American bananas, Brazilian coffee etc.

International trade allows the consumers to get better products, global products, more income to investors, increase competition, better prices, and growth of economy.

Definitions:

Few definitions of International Trade are:

According to Wasserman and Haltman, “International trade consists of transaction between residents of different countries”.2

According to Anatol Marad, “International trade is a trade between nations”.2

According to Eugeworth, “International trade means trade between nations”.2

Types of International Trade:

1. Export: export is the outflow of goods and services from one country to other. It involves inflow of currencies.

2. Import: It is buying goods and services from other nations to home country. It involves inflow of goods and services and outflow of currencies.

3. Entrepot Trade: It is exporting of goods purchased from country to other country after adding value to it. It is also referred as Re-exporting.

Nature and Importance

International trade is not different from domestic trade as the motivation and the behaviour of parties involved in a trade do not change fundamentally, regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly and complex than domestic trade. It involves additional cost, tariff barriers, delays due to cross borders, restrictions and limits imposed by nation son trade, cross culture and different currencies, multiple rules, laws, regulations and various other factors.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.

International Trade Trends

According to “Global Policy Forum”, till 2030, 60% of the world economy be exchanged internationally. That is the share of the rest of the world in each national economy will be more than the share of his own domestic economy. Many current evidences are in line with this prediction. For example, either country in the world is now member of, at least, one international trade agreement. In such circumstances, domestic economy will be affected more and more by the world economy. That is, the level of income, employment, wages, growth, and development in a country is not only a result of its domestic policies, but also determined by its position in the world economy. No market is spared by this fact. Sometimes, a good economic policy regarding his international relations is more beneficial than any policy arranging domestic economic issues of that country.4

In most countries, it represents a significant share of gross domestic product (GDP). In 2010, the value of international trade achieved 19 trillion US dollars, i.e. about 30% of the world GDP. That is, about one third of the produced goods and services are exchanged internationally around the world.1

Export by India

India exports approximately 7500 commodities to about 190 countries. India exported US$ 264 billion worth of commodities in 2015. The following table shows India’s 11 largest destinations for exports:

Export Partners of India

Rank	Country	Value (US$ billion)	Share of overall exports
1	United States	40.4	15.3%
2	United Arab Emirates	30.3	11.5%
3	Hong Kong	12.2	4.6%
4	China	9.5	3.6%
5	United Kingdom	8.9	3.4%
6	Singapore	7.8	3%
7	Germany	7	2.7%
8	Saudi Arabia	7	2.7%
9	Sri Lanka	5.5	2.1%
10	Bangladesh	5.5	2.1%
11	Vietnam	5.3	2%

Source: https://en.wikipedia.org/wiki/List_of_the_largest_trading_partners_of_India

Import by India

India imports around 6000 commodities from 140 countries. India imported $390.7 billion worth of commodities in 2015, down by 15% from the previous year.

The following table shows India’s 11 largest sources of imports:

Rank	Country	Value (US$ billion)	Share of overall imports
1	China	61.5	15.8%
2	Saudi Arabia	21.4	5.5%
3	Switzerland	21.1	5.4%
4	United States	20.5	5.2%
5	United Arab Emirates	20.3	5.2%
6	Indonesia	13.9	3.5%
7	South Korea	13.1	3.4%
8	Germany	11.8	3%
9	Iraq	11.3	2.9%
10	Nigeria	10.2	2.6%
11	Qatar	9.7	2.5%

Source: https://en.wikipedia.org/wiki/List_of_the_largest_trading_partners_of_India

Regulation of International Trade

International trade is considered to be the most important determinants of economic development of a country, all over the world. The international trade consists of import and export of goods and services, which results into outflow and inflow of foreign exchange. This is called as EXIM Trade.

International trade is trade among different nations, so it involves currencies of different nations for exchange. For example, if trade is between India and USA, it requires Indian Rupees and US Dollars, Trade between Europe and India will require Euro. Every nation trades with multiple nations, so it needs various currencies. In order to regulate and control its international trade, several Acts have been made by countries. In India, foreign trade is governed by the Foreign Trade (Development & Regulation) Act, 1992. Payments for import and export transactions are governed by Foreign Exchange Management Act, 1999. Physical movement of goods and services through various modes of transportation is governed under Customs Act, 1962.

Factors for consideration

Before entering and allowing International Trade with the foreign nations, there are many factors that are considered and effects the trade :-

Trade and development: International trade helps a country in economic growth. Every nation is interested in its development. But safety of the nation cannot be put at stake. Impact of trade and economic development should result in industrialization, technology transfer, know-how, employment etc.
Profit : Every business works for profit. Every country decides on which products and services should be exchanged. Those goods which effect the GDP of the nations are preferred for trade. There are various trade theories which helps the nation to decide.
Domestic Industry : While deciding on which products and services are to be imported and exported one of the main factor that is considered is protection of domestic industries. Few products needs protection and thus are restricted through various policies. Before liberalizing trade of such goods economic consequences are taken into consideration.
Pattern and volume of trade: nations decides which goods are to be traded by which countries, and how much of those goods are traded. How much volumes is to be traded depends upon the growth required in different industries and overall economic development.
Free Trade Agreements (FTAs): Different nations enter into foreign trade agreements and adopt liberalization policy. They share different rules and regulation with member and non member. Policies are also different for FTA and Non FTAs. It also effect and reflect the relations of two or more nations with each other.
Trade and Labour economics: Trade across nations can also effect in reducing inequality, income discrimination, better wages and employment of unskilled and semi skilled labour.
Trade and political economy: Trade depends upon the political relations of the nations. Liberalization of trade policy is affected by it. These relations are very crucial in deciding the policies and effects the potential trade.
International policy coordination: foreign trade determines the international trade relations. Various International Agenies and institutions are involved in it. The coordination among various nations also depends upon the rules and regulation of International organizations and its roles in promoting liberal trade among nations.

Advantages of International Trade

International Business has many advantages for the producers as well as for the countries. Some of them are mentioned as below:

1. Increases Efficiency : International trade allows wealthy countries to use their resources like labor, technology , capital more efficiently. Countries have different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries.

2. Better utilization of Resources. The producer try to control the cost by optimum combination of factors of production. So there is no misuse of production factors. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can.

3. Monopoly. It helps in eliminating monopolies. The goods and services can be imported and surplus can be exported. In both cases the seller cannot create monopoly in the market.

4. Employment Generation: When countries increase their export, it expands its manufacturing , which will required more human power and thus generates employment.

5. Economies of Scale. The economies of production, transport, management, finance and advertisement are available to the producers.

6. Foreign Direct Investment: International trade not only results in increased efficiency but also allows countries to participate in a global economy by encouraging the opportunity of foreign direct investment (FDI). Nations can therefore grow more efficiently and can more easily become competitive economic participants.

7. Cultural Diversity: Cross culture exchanges are promoting these days with increase in international trade. People across boundaries learn about different cultures, taste preferences.

8. Economic Development. Due to international trade both the production and per capital income increases which result in economic prosperity.

9. International Relations. It helps to develop good relations with other countries, which can lead to economic prosperity and development.

10. Transfer to Technology. With the development trade relations they can transfer improve methods, machinery, technical know-how, technology.

11. Price Equality: Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilizes the prices, making allowances for transport and other expenses

12. More Choices to Consumers: it helps consumers in getting more choices. Consumers get large varieties and better choices.

13. Quality Products: to maintain the market overseas, it is required by the companies to maintain standards and quality of the products.

14. World Peace. When countries involve in international trading, they want to keep friendly relations with each other in order to increase the trade and invest in resources and this helps in maintaining congenial relations with other nations.

15. Cooperation at Time of need: International trade promotes better cooperation among the world nations. They help each other at the time of need like natural calamity, wars etc. e.g when earthquake happened in Nepal in 2015, India sent immediate help to it.

Disadvantages of International Trade:

Local Industry Suffers. When countries import goods or services from other counties. They are ready to use and cheap prices and local industry cannot compete the quality or price, living example is Chinese products.
Excessive Use Natural Resources: After involving in international trade market, countries want to export in bulk quantity. They must produce goods in bulk which involve utilization of natural resources.
Shortage in the Local Market. For capturing market share, countries involve to export too much as a result they face shortage in the local market and notice hike in prices.
Unemployment. When the capitalists find that importing goods can give them more profit then producing it in the local market, they prefer to import which lead to unemployment in the local market.
Colonialism. Sometimes independent countries become colonies of other nations. Good example is large corporations and mega-projects. Time comes when their whole economy is controlled by corporate tycoons. They become so powerful that destabilize the countries economically and politically.
Economic and Military War. Every country wants to lead in export and economic sound position, which leads to become economic rivals. They want to destabilize other rivals by terrorism, wars etc. Exporting military weapons, atomic weapons (aircrafts, missals, tanks, automatic and semi atomic guns etc) is another example of international trade.

EVOLUTION OF INTERNATIONAL TRADE:

“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A cooperative trade network…set the pattern that would endure for the next 6,000 years.”Matt Ridley, “Humans: Why They Triumphed,” Wall Street Journal, May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533 386933138.html.

In more recent centuries, economists have focused on trying to understand and explain these trade patterns. Chapter 1 “Introduction”, Section 1.4 “The Globalization Debate” discussed how Thomas Friedman’s flat-world approach segments history into three stages: Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to 2000, and 3.0 from 2000 to the present. In Globalization 1.0, nations dominated global expansion. In Globalization 2.0, multinational companies ascended and pushed global development. Today, technology drives Globalization 3.0.

7. To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories.

Different theories from time to time has been produced to understand how, when and which products be traded to take advantages of international trade.

Theories of the international trade are:

1. Classical or Country-Based Trade Theories

a. Mercantilism

b. Absolute Advantage

c. Comparative Advantage

d. Factors Proportions Teory

2. Modern theories

a. Country Similarity

b. Product Life Cycle theory

c. Global Strategic Rivalry

d. Porter’s National Competitive Advantage

Summary:

Trade is the concept of exchanging goods and services between two people or entities. International trade is the concept of this exchange between people or entities in two different countries.
There are many advantages that the economies reap develop due to trade like economic growth, employment, economies of scale, better product choices, balance of trade, price stability. But it has its limitations of threats to domestic business, economic wars, and outflow of capital, exploitation of resources. Since it I impact trade are complex, and economists throughout the centuries have attempted to interpret trends and factors through the evolution of trade theories.

Further Reading

Books:

(i) Terpstra, Vern and Sarathy, Ravi, “International Marketing”, 7th edition, The Dryden Press.

(ii) Onkvisit, Sak and Shaw, John J, “International Marketing: Analysis and strategy”, Ist edition, Merrill Publishing Company.

(iii) Keegan, W.J., “Global Marketing Management”, 5th edition, Prentice Hall of India Pvt. Ltd., New Delhi.

(iv) Philip R. Cateora, and John L. Graham, “International Marketing”, 10th edition, Tata McGraw Hill Publishing Co. Ltd., New Delhi.

(v) Charles W. Hill, “International Business – competing in the Global marketplace”, Tata McGraw Hill Publishing Co. Ltd., New Delhi.

Website:

(vi) http://gsme.sharif.edu/~trade/

(vii) http://www.yourarticlelibrary.com/foreign-trade

(viii) http://gsme.sharif.edu/trade