INTERNATIONAL TRADE

International trade, also known as foreign trade, is the exchange of goods and services between
countries; it can either be in form of bilateral trade or multilateral trade;
Bilateral trade. Bilateral trade is trade exclusively between two countries, particularly, based on
mutual deals between the two governments. Bilateral trade agreements are often intended to
benefit both trading partners.
Multilateral trade. Multilateral trade is one that takes place among many (more than two)
countries at a time.
Import and Export trade. International trade constitutes import trade as well as export trade;
import trade is the buying of commodities by one country from another country whereas export
trade is the selling of commodities by a given country to another country.

The basis (origin) of International trade (How does international trade arise)
International trade arises due to the following factors;
 The differences in natural resource endowment between countries means that some
countries are unable to produce some goods they need because they don’t have the
required resources, therefore necessitating importation of finished goods from other
countries that have the resources to produce them.
 The differences in skills of labour between countries results in differences in capacity
to produce different goods and services. A country is compelled to import those
commodities it needs but unable to produce due to lack of relevant skills to produce
them.
 Limited mobility of factors of production across international borders. Since
resources cannot be easily and cheaply moved across countries, countries are unable
to produce all that they need therefore find it cheaper to import such goods rather than
produce them themselves.
 Difference in the level of technology between countries. Some countries are unable to
produce some commodities due to absence of the necessary technology needed to
produce such goods for example, manufacture of electronic equipment and other
sophisticated gadgets, hence the need to import such goods from other countries that
are able to produce them.
  The need to earn foreign exchange needed for different purposes. Foreign exchange is
mainly earned through selling commodities to other countries.
 International differences in the costs of production and prices of goods. Countries
find it cheaper to produce some commodities than others, so they tend to specialise in
those goods they produce more cheaply the surplus of which they trade with other
countries to acquire what they don’t produce.
 The need to get rid of surplus output. Countries produce goods in excess of domestic
need, hence must find foreign markets to get rid of them.
 To reap the benefits from Specialisation and international division of labour. Each
country produces goods for which it is best suited depending on the available
resources.
 To promote political ties between trading partners. International trade may be induced
by the desire to create political ties between the countries involved or to extend a
form of political ideology from one country to another.
 Differences in tastes and preferences between countries. The differences in demand
for goods in the different countries induce them to sell what they produce but do not
need to other countries, and import what they need produced in other countries.
 To encourage social and cultural exchange. International trade enables exchange
social and cultural ideas.
The positive role of international trade
 International trade enables effective use of surplus resources in the economy. This is
because international trade widens the market for a country’s products beyond the
domestic market, hence increasing the scale of production.
 It enables technological transfer between trading partners, where modern means of
production are imported into one country from another, usually more developed country,
which helps to promote technological development in the recipient countries
 The country engaged in international is able to achieve economic diversification by
producing a variety of goods to meet demand of different trading partners. This helps to
reduce the risk of dependence on only one or a few economic activity.
 International trade enables the citizens of a country to have access to a variety of goods
and services imported from different sources. This helps to improve welfare of the people
due to a variety of choice available to them.
 International trade widens tax base of the country which increases the level of tax
revenue. The government levies taxes on both her imports and exports to get revenue to
meet its expenditure.
 International trade promotes economic growth by encouraging large scale production
since more is produced to meet both the local and international demand for goods and
services.
 International trade promotes international cooperation, friendship and mutual co-
existence. This is necessary for countries to engage in trade amongst themselves which
brings about international peace.
 International trade enables a country to supplement on its domestic output so as to satisfy
her needs. Countries are not able to produce all goods and services in the amount needed
to satisfy demand in the economy so they must import to so as to be able to satisfy the
domestic need.
 International trade enables a country acquire foreign exchange. This is achieved through
exportation of goods. Foreign exchange is needed to finance the country’s imports as well
as meeting other financial international obligations.
 International trade helps improve on the quality of goods and services produced. This is
achieved through competition for the international and domestic market by the different
countries.
 More employment opportunities are created in the economy due to increased production
activities to meet the demand in the foreign market.
 International trade encourages specialization and associated benefits. This is achieved
when each country concentrates on one or a few activities it can do best since it is assured
of supply of goods and services from her trading partners.
 International trade increases efficiency of local producers. This is achieved through
competition on the world market.
 International trade enables countries to acquire skilled manpower from other countries.
  It promotes infrastructural development. The countries must put in place transport,
storage, financial and other infrastructure to facilitate foreign trade.
 International trade enables countries to get supplies in times of emergence. When there is
urgent need of supplies say in case of famine, the country is able to overcome this by
importing food.
 International trade promotes capital inflow into the country engaged in trade. Foreign
investors bring in financial resources to invest in production of goods for export.
 International trade enables a country to obtain what it does not produce. For example
most developing countries are unable to produce capital goods and a variety of
manufactured goods which they have to acquire through trade with developed countries.
 It enables a country obtain new ideas and values which raises standard of living and
development in that country.
 International trade promotes entrepreneurship in the economy, as more people engage in
trade for the export market.
Negative effects of international trade
 International trade results in over exploitation of natural resources in the economy. This
arises due to mass production which is associated with specialization.
 Local firms are out competed which results in their collapse. This usually is the case
when buyers prefer the cheaper and better imports to the more expensive but poor quality
goods which are domestically produced.
 Neo colonialism arises due to high trade dependence of developing countries on
developed economies.
 It encourages dumping, which tends to discourage domestic producers of similar goods in
the country where dumping is done. Dumping is defined as the act of a manufacturer in
one country exporting a product to another country at a giveaway price which is either
below the price it charges in its home market or is below its costs of production with the
intention of to getting rid of the goods.
 The terms of trade of the country may worsen. This happens when the import price index
of a country is greater than her export price index.
 It worsens balance of payment problems. This arises when a country spends more on her
imports than what she earns from her exports.
  It is possible for the country engaged in international trade to suffer from imported
inflation which arises due to importation of goods from inflation prone countries.
 Low or no tax revenue is realized by government from imports. The country loses
revenue by not levying taxes on imports since it is free trade.
 Free trade leads to importation and use of undesirable goods. Since there are no
restrictions on what to import, some undesirable commodities are imported which may
have a negative impact on the welfare of the public.
 Free trade results in dependence and Political dominance. This occurs where a
developing economy relies on others especially the more developed economies for vital
imports or for the export market.
 Free trade leads to high unemployment because it opens up infant industries in
developing economies to harsh competition against better and cheaper goods from the
more developed countries resulting in the collapse of the infant industries which leads to
unemployment of those previously employed there.
 It leads to cultural erosion. Domestic ways of living tend to be replaced by foreign ways
as culture is imported especially from the developed countries.
 Free trade retards the development of local skills. This arises when the country largely
depends on imported skilled manpower and imported goods.

Terms used in international trade.

1. Tariff barriers
A tariff barrier is the duty/tax (customs duty) levied by a government on the imported or
exported items, high taxes on imports raise the market prices for the imports which tend to
discourage the demand for them and thereby discourage their importation.
These taxes may be specific; where a fixed rate is levied per physical unit imported, sometimes
they are ad valorem in nature (levied according to value of the item imported).
2. Non-tariff barriers The Non-tariff barriers are all those trade controls which do not
involve levying of taxes, these include the following;
i. Embargo/ban. This is the act of the government prohibiting the importation or
exportation of a specified type of commodity or commodities
 ii. Imposition of quotas. An Import quota is the maximum allowable quantity of import set
for specific products for a specified time period.
iii. Quality control. This involves government setting a certain standard of quality of
imports that importers must comply with for any goods imported, usually a high standard
is set to restrict trade.
iv. Direct administrative controls. This is where the government puts in place various
administrative rules such as those regarding food safety, environmental standards,
electrical safety, lengthy procedure that importers must go through before they are able
to import, such that only a few are able to endure to fulfill them hence reducing the level
of importation.
v. Foreign exchange control. Through the central bank, the government is able to ration
the foreign exchange so as to avoid excessive importation, especially of luxuries.
vi. Licensing policy. This is where the government requires that all importers must have a
license to import only a specified type of goods, and to obtain such a license one must
first fulfill certain criteria thereby limiting the number of importers and items imported.
vii. Advanced deposits on imports. Here the government requires that importers make
advance deposits on imports depending on the value of imports before being given
permission to import as a way of discouraging importers so as to reduce on the level of
imports.
viii. Subsidization of domestic industries. The government gives subsidies to domestic
producers to lower the cost of production they incur so that their commodities have a cost
advantage over the imported substitutes which discourage the demand for the imports
hence reducing their importation.
ix. Exchange Rate manipulation. A government may intervene in the foreign exchange
market to lower the value of its currency by selling its currency in the foreign exchange
market.
3. Devaluation
Devaluation is the official lowering/reduction of the value of a country’s currency in terms of
foreign currencies by the monetary authority. It involves government, through its monetary
authority fixing the exchange rate at a lower level than its true market rate;
Devaluation differs from Currency depreciation in the sense that
 4. Currency depreciation is the fall in value of local currency against foreign currencies as
a result of interplay of forces of demand for and supply of the currencies. Currency
depreciation arises either when more of it is supplied in relation to its demand or when its
demand reduces in relation to its supply, yet devaluation of a currency is a deliberate
policy of government where government lowers the value of its currency in terms of
other currencies.
5. Currency Revaluation
Currency revaluation is the deliberate and legal government act of raising the value of its
country’s currency in terms of other currencies. It is a deliberate upward adjustment in the
official exchange rate established, or pegged, by government against other currencies or
currency.
6. Trade liberalization. Liberalization of trade is the removal of unnecessary controls on
trade hence giving people the liberty to trade without undue government controls
7. Balance of Payments. Balance of payments is the difference between international
financial expenditure and receipts of a given country in a given period of time.
8. PROTECTIONISM. Protectionism is a commercial government policy of restricting her
import trade with the basic aim of protecting the domestic infant industries from foreign
competition. Protectionism is concerned with restraining or regulating trade with other
nations, through methods such as tariffs on imported goods, restrictive quotas, and a
variety of other government regulations designed to discourage imports, and prevent
foreign take-over of domestic markets and companies.

Trade restrictions.
Definition: Trade barriers are government policies which place restrictions on
international trade. Trade barriers can either make trade more difficult and expensive
(tariff barriers) or prevent trade completely (e.g. trade embargo)
Examples of Trade restrictions

 Tariff Barriers. These are taxes on certain imports. They raise the price
of imported goods making imports less competitive.
 Non-Tariff Barriers. These involve rules and regulations which make
trade more difficult. For example, if foreign companies have to adhere to
complex manufacturing laws it can be difficult to trade.
 Quotas. A limit placed on the number of imports
  Voluntary Export Restraint (VER). Similar to quotas, this is where
countries agree to limit the number of imports. This was used by the US
for imports of Japanese cars.
 Subsidies. A domestic subsidy from government can give the local firm a
competitive advantage.
 Embargo. A complete ban on imports from a certain country. E.g. US
embargo with Cuba.

Foreign aid

Foreign aid refers to the international movement of money, services, or goods from
governments or international institutions for the benefit of the receiving country or its
citizens. Foreign aid can be fiscal, military, or humanitarian and is considered one of the
significant sources of foreign exchange.

Advantages of Foreign Aid

1. Save Lives.
At the onset, foreign aid is there to save lives particularly during calamities and
disasters, like in the case of natural disasters.

2. Rebuild Livelihoods.
Foreign aid helps rebuild lives by providing livelihoods and housing right after a disaster
so that victims can start over.
3. Provide Medicines.
Medical missions are there to offer free medical and healthcare products and services
where they are needed the most.
4. Aids Agriculture.
Foreign support directed towards agriculture helps farmers and increase food
production, which leads to better quality of life and higher quantity of food.

5. Encourage Development.
Industrial development projects supported by foreign aid create more jobs, improve
infrastructure and overall development of the local community.
6. Tap Natural Resources.
Some less developed countries do not have the ability to maximize their otherwise rich
natural resources, but with foreign support, this is possible.
7. Promote Sanitation.
Less privileged communities benefit from foreign aid aimed at providing clean water and
sanitation facilities, which reduces risk of contracting infections and diseases.
 Disadvantages of Foreign Aid

1. Increase Dependency.
Less economically developed countries (LEDCs) may become increasingly dependent
on donor countries, and become heavily indebted.

2. Risk of Corruption.
There is likelihood that foreign financial support do not reach their rightful recipients, but
go to the hands of corrupt political officials.
3. Economic/Political Pressure.
A donor country may place economic and political pressure on the receiving country,
forcing them to return the favor.
4. Overlook Small Farmers.
Foreign support may only benefit large-scale agricultural projects, and not the less
privileged, small farmers who need help the most.

5. Benefit Employers.
Most development may only benefit large corporations and already-wealthy employers,
and not the people who do not have jobs or proper livelihoods.
6. Hidden Agenda of Foreign-Owned Corporations.
Foreign aid is sometimes given to a country or recipient to benefit foreign-owned
corporations and entities. So the help is not actually directed to the less fortunate, but to
its own people.

7. More Expensive Commodities.

When there is development and progress, there is inflation, which causes prices of
commodities to increase, making the poor people more deprived.
Giving help to LECDs is a noble thing, but nations must properly monitor and manage
the flow of foreign aid so that they reach the people who need it, and not go right into
the pockets of corrupt and greedy entities.