Unit-6 INTERNATIONAL TRADE

UNIT-6

INTERNATIONAL TRADE

Trade

            Trade means buying and selling of goods for the purpose of making profit. There are two parties involved in the trade namely buyer and seller.

TYPES OF TRADE

            According to the area of operation, the trade is classified into two, they are,

-Home trade (Domestic trade) (Internal Trade)

-Foreign trade (International trade) (External Trade) (Overseas Trade)

HOME TRADE

Trade which is taken place within the country it is called home trade. Eg:- Trade within the Maldives. Home trade is taken place in both wholesale and retail basis.

INTERNATIONAL TRADE

Trade between two or more different countries is called international trade. There should be at least two countries in trade. Eg:-Maldives and India, Maldives and china etc. The buyer is called importer and the seller is called exporter. Trade between two countries is known as bilateral trade and the trade among more than two countries is known as multilateral trade.

Classification of International Trade

            International trade is classified into three they are,

1. Import trade.

2. Export trade.

3. Entrepot trade (re-export trade)

1. Import trade.

            In this trade, the countries buy necessary goods, which cannot be produced by themselves, from the countries where there is sufficient balance. The basis of international trade is the scarcity of products.

2. Export trade

             In this trade, the countries sell their surplus products to the countries that need them. According to the scarcity of products, which will be sold off in the international market.

3. Entrepot Trade

             In this trade, the countries buy certain goods or raw materials for the purpose of exporting to other countries.

            Eg- Singapore, Hongkong, etc.

Needs of International Trade (Importance of international trade)

1. To utilize the resources maximum.

2. To promote the development of technologies.

3. To get the scarce products from other countries.

4. To increase the income of the countries.

5. Interdependence of countries.

6. To find wide market for the goods.

7. To increase the foreign reserves and technologies.

Difference between Home trade and International trade.

1. International trade involves exchange of goods between countries, whereas home trade involves exchange of goods within the borders of that country.

2. Foreign trade needs exchange of different country’s currencies but in home trade no need of foreign exchange.

3. Foreign trade is usually subjected to several restrictions such as duties, quotas, embargo, etc. but no restrictions are normally imposed on home trade.

4. The rules and regulations may vary from country to country. This does not apply to home trade as both the buyer and seller are governed by the same laws.

5. Foreign trade is always in wholesale basis but home trade may be wholesale or retail basis.

6. In connection with the international trade, customs formalities are to be undergone, whereas no such procedure is involved in home trade.

7. Distance involved in foreign trade is always greater than home trade.

8. Transportation is more complicated and expensive in foreign trade than in home trade.

9. Documentation is more complicated in foreign trade than in home trade.

VISIBLE AND INVISIBLE TRADE.

Visible Trade

In international trade, the export and import of visible (physical) items are considered as visible trade. Such products can be seen and touched.

Eg:- Machinery, food products, raw materials, oil, fuel, etc.

Invisible Trade (Trade in services)

            Invisible trade refers to the export and import of invisible (intangible) things such as services and transfer payments.

 These items cannot be seen and touched.

Eg:- Services such as tourism, transportation, communication, profit from abroad, donations, loans, etc.

BALANCE OF TRADE (BOT)

            Balance of trade refers to the visible balance of a country. This shows the difference between total visible exports and total visible imports. Export and import of all tangible things will be shown in the balance of trade.

            BOT = Total Visible Exports – Total Visible Imports.

Forms of BOT

            1. Surplus BOT.

            If total visible exports excess the total visible imports it is called surplus BOT. It shows a healthy trading status of a country.

            2. Deficit BOT.

            If total visible imports excess the total visible exports it is called deficit BOT. It is unfavourable to the country.

BALANCE OF PAYMENT (BOP)

            Balance of payment shows a complete record of all financial transactions between a country and the rest of the world. It shows total transactions of country by showing both visible and invisible transactions.

            BOP = Total Exports – Total Imports.

Forms of BOP.

            1. Surplus BOP.

            If total exports excess the total imports it is called surplus BOP. It shows a healthy and favourable economic condition of the country.

            2. Deficit BOP.

            If total imports excess the total exports it is called deficit BOP. It is unfavouable and showing economic crisis of the country.

Reasons for the deficit BOP.

1. Increased demand for consumer goods.

2. Increased import of capital goods.

3. Increase in petroleum product’s price.

4. Slow growth of industries.

5. Lack of resources and production

6. Increased cost of production results the dormant industry.

7. High growth of population.

8. Changes in exchange rate.

Measures to increase BOP.

1. Increase production by utilizing the resources maximum.

2. Promote exports by giving aids.

3. Reduce imports by imposing trade restriction measures.

4. Encourage foreign investment.

5. Ensure import substitution.

6. Borrow money from foreign banks or countries.

7. Reduce the usage of non-renewable resources.

DIFFERENCE BETWEEN BOT AND BOP.

1.  BOT is a narrow concept so it is part of BOP, but BOP is a broader concept.

2. BOT deals with visible items only whereas BOP deals with both visible and invisible items.

3. BOT shows a partial record of foreign trade whereas BOP shows a full record of foreign transactions for a particular period of time.

4. BOT is not so important in economic analysis but BOP is very important for economic analysis of a country.

CUSTOMS AUTHORITY

Customs authority is officially committed authority responsible for collecting customs duties for controlling the flow of goods in and out of a country. They inspect all the inflows and out flows of goods in the country.

Functions of Customs Authorities.

1. Collection of duties.

            They collect duties on imported goods, which contribute to the revenue of the government.

2. Collection of trade statistics.

They collect trade information such as total exports and imports of entire goods for the particular period of time. This information can be used for analyzing BOT and BOP.

3. Prevention of smuggling.

 They supervise the movement of goods in and out of the country and ensure that prohibited goods are not imported or exported.

4. Enforcement of Quotas.

The customs authorities ensure that the goods imported are according to the limit imposed by the government.

5. Control of bonded Warehouses.

They control the bonded warehouse where they keep the dutiable goods until the duties are paid off.

6. Public Health.

They ensure the public health by checking the quality of goods as per the existing standard and observing the infectious diseases such as swine flu, bird flu, etc.

TRADING BLOCS

Trading bloc

Trading bloc is a group of countries which have made a trade agreement to trade with each other without imposing any trade restrictions such as customs duties, exchange control, etc.

ASEAN (Association South East Asian Nations)

EU (European Union)

SADC (South African Development Council)

NAFTA (North American Free Trade Agreement)

Features of trading bloc

            1. Free trade

            2. No control on exports and imports

            3. Members have common law

Free trade

            Free trade means trade among the member countries of a trading bloc without imposing customs duties and other strict control. There is free movement of money, capital, people and services.

Advantages to the country joining in a trading bloc

1. There are no tariffs and quotas among the member countries for exchanging goods.

2. There is easier movement of goods and services across borders.

3. More opportunities for trade with neighbouring countries so it ensures wider markets

4. Ensure availability of goods at low price

5. Members follow common law for exchanging goods and human resources

6. Develops better relationship among the member countries

Disadvantages to the country joining in a trading bloc

1. Loss of the revenue for the government because of lack of duties.

2. Home industries get affected due to increased imports.

3. Infant industries become staled due to high competition from other members

4. It causes unemployment due to slow growth of industries.

5. It causes imbalance of resources among the member countries.

6. It may lead to deficit BOP.

TRADE RESTRICTIONS (Trade barriers)

1. Duties or Tariffs.

These are taxes payable on goods imported into the country. If the duty is increased product’s price also increase so it help to protect home producers. Eg:- if duty is increased import will be decreased.

2. Quota.

            It is method of limiting the imports by fixing an upper limit on the quantity of foreign goods entering a country. Eg:- 500 Cars in an year,

3. Embargo.

            It is a partial or complete prohibition of the imports of certain goods with a particular country. Carrying of such goods will be punishable offence for that country. Eg:- Drugs, explosive items, arms and ammunition, certain meats. Etc.

4. Exchange control.

             The government can limit the imports of goods by limiting the amount of foreign currency to be payable to the exporters. Eg:- $ 2000 per month, $10,000 per year.

5. Subsidies.

             Subsidies given to the home industries will result to the increased production and import substitution. This method automatically reduces the import of certain goods. Eg:- Material and financial aids given to the local farm houses.

6. Legal restrictions.

            The government tightens up the importing procedures for certain goods. It results to a decrease in imports of such goods. Eg:- Increased documentation

Problems of exporters (problems in international trade)

1. Problem of distance.

Exporters and importers are separated by the distances so the deliveries may take a long time and this result the transportation more expensive.

2. Language differences.

Exporters and importers belong different countries so they follow different languages which result communication more complicated.

3. Currency problems.

Foreign exchange is an important problem in international trade. Fluctuations in the exchange rate may result the delay in payment as well as loss of value of goods.

4. Trade restrictions.

Different countries follow different trading policies. The trade restrictions such as quota, duties, exchange regulation, etc. may result the export more complicated.

5. Use of intermediaries.

In order to simplify the trading complications abroad, agents or brokers are appointed by the principal by paying commission. It makes foreign trade more expensive and difficult.

6. Cultural changes.

Different countries follow different beliefs and culture. Some products are banned in some countries meanwhile some countries allow them. Changes in fashion may result lack of demand to some products.

7. Increased documentation.

            Comparing with home trade, foreign trade requires more formalities so many documents are necessary for further transactions, it makes foreign trade more complicated.

8. Insurance

            Chance of risk is very high in foreign trade so insurance is must for reducing the likely risk pertaining to the exports. This brings additional expenses to the exporters.

INTERMEDIARIES IN FOREIGN TRADE

1. Delcredere agent

A delcredere agent is a merchantile agent who guarantees to his principal that the customers to whom he sells on credit would pay their dues. It follows that if they do not pay, the agent would bear the loss himself. In returns for his guarantees, he is given an extra commission known as delcredere commission.

2. Forwarding agent.

Forwarding agent is a person appointed by the principal of goods or exporter. He fulfils all the formalities on behalf of the exporter. He receives commission for the services rendered.

Functions of Forwarding agents

1. They fulfill customs formalities on behalf of the exporter.

2. They arrange transportation and warehousing for the goods.

3. They help in documentation regarding export and import.

4. They help to insure the goods.

5. They reduce the problem of communication abroad.