Welcome! In our Economics lesson today, we will be treating the topic “International Trade“. Do have a nice time studying with us!
Topic: International Trade
Learning Objectives: By the end of the lesson, the learners should be able to:
- Explain the term international trade;
- Mention and explain the types of international trade;
- Identify the terminologies in international trade;
- State the differences and similarities between international trade and internal trade;
- State the reasons for international trade;
- State the barriers or problems of international trade;
- State the advantages and disadvantages of international trade;
- List and explain the division of international trade;
- State the procedures for international trade.
International trade also known as foreign trade or external trade involves the exchange of goods and services between two or more countries. The principle underlying the buying and selling between one country and another is specialisation. The theory of international trade, therefore, is based on the principle of comparative cost as propounded by David Richardo. The theory states that a country should specialise in the production of goods and services for which it has cost advantage over another country.
This, be pointed out will bring about the production of goods at cheaper cost. For example, Nigeria purchases goods like automobiles and electronics from overseas countries and sells commodities like cocoa, groundnut, crude oil etc to them.
Types of International Trade.
There are two major types of international trade, these are:
i. Bilateral international trade: Bilateral international trade is a trade agreement in which two countries exchange goods and services. It occurs when each country tries to balance its payments of receipts separately and individually with each other.
ii. Multilateral international trade: Multilateral international trade is a type of internal trade in which a country trades with many other countries. This ensures international division of labour. It is a type of trade in which many countries exchange their goods and services, e.g Nigeria trades with the U.S.A, Britain and Japan. Multilateral international trade is necessary if the total volume of world trade is to be raised to its maximum.
Internal trade, also known as domestic trade or home trade involves the exchange of goods and services among the people within a particular country. Internal trade involves the buying and selling of goods and services within a particular country e.g Nigeria. The items of internal trade I those goods and services which are produced and sold internally or locally. In Nigeria for example, such items include yam, coffee, maize, rice and many other locally manufactured goods.
Terminologies in International Trade
i. Free trade: Free trade refers to non- restriction on international trade. Buying and selling can take place between different countries without the imposition of artificial barriers such as absence of custom duties quotas, embargoes. There is perfect mobility of commodities and factors of production between countries.
ii. Infant industries: Infant industries are newly established industries. They are still in their tutelage and must be protected from foreign competition, to safeguard their survival.
iii. Devaluation: Devaluation is the lowering of the exchange value of a country’s currency vis-a-vis other countries. This makes import to be expensive and export to be more attractive.
iv. Depreciation: Depreciation refers to the fall in the value of a country’s currency against other currencies as a result of the interplay of the forces of demand and supply.
v. Jumping: Dumping is the practice of selling goods in foreign countries at lower prices than what are obtainable in the exporting country.
Similarities And Differences Between International Trade And Internal Trade
i. Both international trade and internal trade involve the use of money as a medium of exchange.
ii. They are also similar in that they both involve a degree of specialisation between the trading partners, since specialisation causes exchange.
iii. Both forms of trade involve the activities of middlemen.
iv. Both trades involve the buying and selling of goods and services.
v. Both of them arise due to inequitable distribution of natural endowments and production resources.
i. Foreign trade involves the exchange of goods and services act national frontiers while internal trade involves the exchange of goods within the borders of a country.
ii. In foreign trade, buyers and sellers use different currencies whereas buyers and sellers in home trade use the same type of currency.
iii. There is possibility of restriction – tariffs, import duties, export duties, quotas, embargoes – when goods are exchanged across national boundaries while this does not occur in home trade.
iv. There are differences in system of weighing and measuring in one country vis-a-vis an other. A country has only one system of such weighing and measuring.
v. Differences in transport cost due to distance between buyers and sellers, documentation requirement, need for insurance in respect of foreign trade distinguish foreign trade from home trade.
vi. There are also differences in legal systems and culture under international trade but the legal systems are the same in domestic trade.
vii. Foreign trade requires knowledge of new languages and interpretations while in domestic trade, a common language is used.
Reasons Or Basis For International Trade
Countries engage in international trade for the following reasons:
i. Uneven distribution of national resources: Natural resources are unevenly distributed. While some countries are naturally blessed, others have little or no natural resources. This necessitates international trade.
ii. Differences in climatic condition: The climatic condition of the earth varies from one region to another. This variation gives rise to growth of different crops, hence the need for exchange.
iii. Differences in technology: The level of technology differs from one nations of the world to another. Some countries with advanced technology can produce some industrial products at reduced cost and sell to the less developed countries.
iv. Differences in skills: The inhabitants of a region may develop special skills in the production of a commodity such that it acquires special reputation for its skill. This can necessitate foreign trade.
v. Expansion of market for products: Foreign trade came into existence because of the need to widen the market for goods produced by a country.
vi. Differences in taste: Differences in taste of various countries call for international trade.
vii. Desire to improve the standard of living: Countries engage in international trade in order to improve the standard of living of the people.
Barriers Or Problems Of International Trade
1. Language problem: Different languages are spoken by different countries of the world. Communication between businessmen from various countries with different linguistic background may be difficult.
2. Problem of distance: It may take days or weeks before one moves from one countries to an other because of the long distances involved. This may delay quick exchange of goods and services e.g Nigeria and Japan.
3. Numerous documents: The documents used in international trade are two many. This makes the processing of foreign trade too long and sometimes cumbersome, e.g bills of exchange, ship manifest, certificate of origin, etc.
4. Differences in currency: Every country has its own currency which is different from the currency of other countries. In foreign trade, the currency must be converted before meaningful transactions can take place.
5. Tariff; A country can impose duties (tariff) on imported goods and this will make the goods to be more expensive.
6. Trade imbalance: International trade often leads to trade imbalance among nations with the effect that viable countries may not transact business with the weaker ones.
7. Government policy: Foreign trade can be hindered by the political ideologies of different countries. A country can deliberately decide not to trade with another country because of its political differences e.g the USA and Libya in 1988.
8. Weights and measures: There is no international uniformity in the system of weighing and measuring of goods. The system is not standardised, hence it has to be converted and this hinders trade.
9. Artificial barriers: Foreign trade can be hindered through the imposition of outright ban on products, quota systems or imposition of licenses on goods.
10. Transport/Communication: Businessmen from different countries especially African countries find it difficult to contact their partners in other countries because of poor communication and transport facilities. This hinders foreign trade greatly.
Advantages Of International Trade
i. Sources of revenue: International trade is a source of revenue foe nations of the world. Nigeria derives 90% of its revenue from the sale of crude oil to other countries. Taxes can also be imported on exported and imported goods.
ii. Promotion of economic development: International trade helps countries to gain technical knowledge which accelerates economic developments e.g farmers in Nigeria can now import tractors, harvesters etc to practice large scale farming.
iii. Provision of employment opportunities: As a result of international trade contacts, foreign investors can establish firms in sister countries which will create employment opportunities for its citizens.
iv. It leads to international specialisation: Through international trade, countries will specialise in the production of goods for which they have comparative advantage over others. This will make prices of such goods cheaper.
v. Increase in world output: When countries specialise in the production of goods and services in which they have comparative advantage and where full utilisation of resources is made, the world output will increase.
vi. Availability of variety of goods: Through foreign trade, wide variety of goods are made available. West African countries can import cars, electronics, shoes and equipment etc, from other countries. New products are produced for new markets.
vii. Acquisition of skills and ideas: Through international trade, new ideas, skills and techniques can be acquired to improve the quality of goods and services.
viii. Increase in standard of living: Since there is exchange of different goods and services among countries, the standard of living increases. People can get what they need which they cannot ordinarily produce.
Disadvantages Of International Trade
i. Encouragement of dumping: International trade can lead to dumping of goods into the less developed countries by multinational companies from the developed nations. These countries therefore become dumping grounds for all kinds of products.
ii. It affects infant industries: Foreign trade also affects newly established industries (infant industries) negatively as they cannot complete favourably with their well established foreign counterparts.
iii. Unemployment: Foreign trade can lead to unemployment because continued importation of cheaper products from foreign countries may reduce the level of production of local industries producing similar products and this may result in retrenchment of workers.
iv. It leads to exploitation: The developed nations which are highly Industrialisation may use their advantageous position to exploit the less developed countries.
v. Creation of balance of payment deficit: This is possible when foreign trade is not restricted and the level of import is higher than export. This may lead to a drain in the foreign exchange reserve which can result in balance of payment problems.
vi. Importation of dangerous or harmful goods: Through foreign trade, harmful or dangerous goods can be imported into a country by unscrupulous businessmen.
Division of International Trade
International trade can be divided into three: Import, Export and Entrepot trades.
(a) Import trade: Import trade is defined as the act of buying goods and services from other countries. It is sometimes restricted to control a country’s balance of payment. The goods are imported either in response to direct orders or on consignment. Import trade is divided into: Visible and Invisible trade.
i. Visible imports: Visible imports consist of goods that can be seen and touched i.e, tangible goods which come from other countries, Nigeria’s visible imports, for example, include automobiles, electronics, plants and machinery etc.
ii. Invisible imports: Invisible imports consist services rendered by other countries that cannot be seen or touched. Examples of invisible imports are banking, tourism, aviation, etc. This will appear in the balance of payments.
(b) Export trade: Export trade may be defined as the act of selling goods and services to other countries. It is the selling of a country’s products abroad. Some governments frequently attempt to encourage exporters by introducing export subsidy. Export can equally be divided into visible and invisible exports.
i. Visible exports: These consist of goods which are sold in oversea market i.e to other countries. In Nigeria, visible exports are cotton, groundnut, palm oil, crude oil, textiles, etc.
ii. Invisible exports: Invisible exports consist of services rendered to other countries. Such services include transport, banking, insurance and other consultancy services.
(c) Entrepot: Entrepot is a form of foreign trade in which goods shipped to one port are subsequently re-exported to another port. If customs duty had been paid on imported goods which are later re-exported, the duty can be claimed back. Simply put, entrepot is the re-exported of goods imported from other countries.
Procedures for International Trade
For international trade to take effect, certain procedures must be followed. The step-by-step procedures are:
i. The importer and exporter are brought together through different means e.g letter of inquiry.
ii. The next step is for the producer to send quotations to the buyer in response to the letter lf inquiry. The quotation will show the description and features of the products.
iii. After receiving the quotation, the importer will place an order with the manufacturer. The indent will show details of goods, prices and date of delivery.
iv. The next step is to make arrangement for payment through any agreed means of payment e.g documentary credit, telegraphic mail transfer etc.
v. Then, an agreement for the goods to be shipped through a shipping company will be made. The shipping agent will get all the necessary documents like shipping note, calling forward note, etc; the goods will be packed and well arranged in containers.
vi. The exporter will then prepare and send copies of bill of landing to the importer in advance. Other documents that will accompany the consignment will be prepared and sent.
vii. When the goods arrive, the clearing agent will process and complete all necessary documents. The agent will check the manifest to ensure that the goods are on board. The customs personnel will assess the consignment and compute the duties to be paid.
viii. The goods will be taken to the warehouse after all necessary documentations have been completed.
Done studying? See all previous lessons on Economics
Take a quick test for this lesson
- What do you understand by the term international trade?
- Mention and explain the types of international trade.
- Identify the terminologies in international trade.
- State the differences and similarities between international trade and internal trade.
- State the reasons for international trade.
- State the barriers or problems of international trade.
- State the advantages and disadvantages of international trade.
- List and explain the division of international trade.
- State the procedures for international trade.
Questions answered correctly? Kudos!
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